Ilargi: A gigantic miss in the BLS June jobs report. Way below expectations at 18,000 new jobs. Unemployment rises to 9.2%. In Italy, everything rumbles. Trading of major bank Unicredit was halted.

So what do we do? We look at North America's coming soon to a theater near you gas crisis. Here's Stoneleigh back from a long trip:

Stoneleigh: In this era of global bubble-blowing we have seen speculative fever flourish in relation to many different asset classes. At the peak of a bubble the euphoria can be palpable, and the perception that 'it's different this time' confers a sense of invulnerability that justifies throwing caution to the wind.

Speculators cease to worry about how much they pay for an asset, since they think someone else will always pay more later. Unfortunately for those caught up in powerful swings of herding behaviour, it's never different this time. Boom inevitably turns into bust, because the supply of Greater Fools is not infinite after all.

Speculative financial flows seeking 'alpha' can overwhelm important sectors of the real economy. Price, driven by perception rather than by reality, significantly over-reaches the fundamentals. Demand is artificially brought forward. That apparent demand drives considerable mal-investment and a pathological level of risk-taking. When the bubble reaches its maximum extent and implodes, speculation moves into reverse and the sector is dumped.

The artificial demand stimulation disappears, leaving a demand vacuum. The scale of the mal-investment becomes obvious, and prices head for a significant undershoot of the fundamentals. A bubble that created virtual wealth temporarily, leaves very real economic wreckage in its wake. When a critical economic sector is affected, the fallout can be very painful.

We have been witnessing just such a dynamic playing out in the North American natural gas market in recent years, with a particular focus on the shale gas that is touted as being the key to energy independence. The hype over a supposed 100 year supply of cheap, clean energy has been pervasive. Vast sums of money have been committed as a result, despite very little critical evaluation of the real world prospects, at least in the public domain.

Thankfully there have been a few sober voices in the wilderness who were prepared to challenge the received wisdom, most notably Arthur Berman (whose superb work can be found at The Oil Drum) and Canadian gas expert David Hughes.

Conventional supplies of natural gas peaked 10 years ago, and concern over supply began a few years later. Considering that natural gas provides some 20% of electricity and 60% of home heating (more in the north east), it is not surprising that apparently imminent supply problems would have been a cause for concern. A particularly good review of the situation at the time can be found in Julian Darley's 2004 book High Noon for Natural Gas.

Unconventional gas sources (shale gas, coal bed methane and tight formation gas) have since appeared to be game-changers, and game-changers can restore complacency remarkably quickly. But, appearances can be deceiving, and complacency is dangerous.

Energy independence is the Holy Grail of what passes for energy policy in the US. The last 8 presidents have all stressed its importance, but none has been able to do anything about a growing dependence on energy imports, many from unstable parts of the world, or from energy exporters with increasing domestic demand who are well along the depletion curve themselves. There have been speeches on the value of ethanol and other biofuels, along with incentives for their production, but a conviction that energy independence might actually be achievable only really seemed to emerge with in recent years in relation to shale gas.

Apart from the policy windfall, an apparent gas bonanza offered the potential for lucrative financial returns (especially on land speculation), and it allowed environmental organizations to support gas as a transitional fuel on the path to a renewable energy future. Across the board support for shale gas was virtually guaranteed. However, strong consensus is always a red flag, as we have discussed many times here at The Automatic Earth. The stronger the consensus, the more it pays to question what so many uncritically hold to be true. It is clearly time to take a more in-depth look at the real prospects for natural gas in North America.

Geologist Arthur Berman has been the most prominent public critic of shale gas. His major points of contention lie in the companies 'manufacturing model', their extrapolation of gas reserves, the implication of rapid decline rates, and the destruction of shareholder value as the numbers simply do not add up. The 'manufacturing model' utilized by the gas companies asserts that all parts of a gas play are equal, so that one may drill anywhere with comparable success. Extrapolating from the few most successful wells yields reserve estimates that Mr Berman feels are hugely inflated. He demonstrates that all shale gas plays contract to a core area, typically representing no more than 10-20% of the original area.

In addition to there being relatively few 'sweet spots' in shale plays, Mr Berman also points out that shale gas wells show much more rapid depletion rates than conventional natural gas wells (65-85% in the first year, as compared to 25-40%), and that this has an inevitable impact on extrapolations of recoverable gas supplies.

In his view, the shale gas resource is vastly less than the estimates that have entered the public consciousness:

I recently grouped all the Barnett wells by their year of first production. Then I asked, of all the wells that were drilled in each one of those years, how many of them are already at or below their economic limit? It was a stunning exercise because what it showed is that 25-35% of wells drilled during 2004-2006 - wells drilled during the early rush and that are on average 5 years old-are already sub-commercial. So if you take the position that we’re going to get all these great reserves because these wells are going to last 40-plus years, then you need to explain why one-third of wells drilled 4 and 5 and 6 years ago are already dead [..]

If you investigate the origin of this supposed 100-year supply of natural gas…where does this come from? If you go back to the Potential Gas Committee’s [PGC] report, which is where I believe it comes from, and if you look at the magnitude of the technically recoverable resource they describe and you divide it by annual US consumption, you come up with 90 years, not 100. Some would say that’s splitting hairs, yet 10% is 10%. But if you go on and you actually read the report, they say that the probable number-I think they call it the P-2 number-is closer to 450 Tcf as opposed to roughly 1800 Tcf.

What they’re saying is that if you pin this thing down where there have actually been some wells drilled that have actually produced some gas, the technically recoverable resource is closer to 450. And if you divide that by three, which is the component that is shale gas, you get about 150 Tcf and that’s about 7 year’s worth of US supply from shale. I happen to think that that’s a pretty darn realistic estimate. And remember that that’s a resource number, not a reserve number; it has nothing to do with commercial extractability. So the gross resource from shale is probably about 7 years worth of supply.

Stoneleigh: Consistently disappointing results have not so far burst the shale gas bubble, as people seem all too willing to believe the hype without question. This lack of critical thinking is characteristic of bubble psychology. Bubbles are formed as an interaction between predators and willing victims blinded by greed. It's important to remember that it's never 'different this time'.

Shale play promoters constantly try to divert attention and analysis from current plays to newer plays. Newer plays have less data to analyze and, therefore, reserve claims are more difficult to question. Because the Barnett and Fayetteville shale plays have under-performed expectations, we were invited a few years later to consider the future potential of the Haynesville Shale play.

Now that the Haynesville looks disappointing, we are asked to consider the Marcellus Shale play. Since the State of Pennsylvania does not publish monthly production data for analysts to evaluate, no one can dispute or confirm the claims made by operators. With the shift to liquids-rich plays like the Eagle Ford Shale, we are again asked to trust the same promoters that sold us under-performing plays in the past that this time it will be different.

Stoneleigh: The shale gas bubble is a perfect example of the irrationality of markets, the power of perverse short-term incentives, the driving force of momentum-chasing, the dominance of perception over reality in determining prices, and the determination for a herd to stampede over a cliff all at once. The perception of a gas glut has driven prices so low that none of the participants are making money (at least not by producing gas) or creating value. We see a familiar story of excessive debt, and the hollowing out of productive companies dead set on pursuing a mirage.

It’s all about production numbers. They call these things asset plays or resource plays; that reflects where many are coming from, because they’re not profit plays. The interest is more in how big are the reserves, how much are we growing production, and that’s what the market rewards. If you’re growing production, that’s good-the market likes that. The fact that you’re growing production and creating a monstrous surplus that’s causing the price of gas to go through the floor, which makes everybody effectively lose money….apparently the market doesn’t care about that. So that’s the goal: to show that they have this huge level of production, and that production is growing.

But are you making any money? The answer to that is…no. Most of these companies are operating at 200 to 300 to 400 percent of cash flow; capital expenditures are significantly higher than their cash flows. So they’re not making money. Why the market supports those kinds of activities…we can have all sorts of philosophical discussions about it but we know that’s the way it works sometimes. And if you look at the shareholder value in some of these companies, there is either very little, none, or negative. If you take the companies’ asset values and you subtract their huge debts, many companies have negative shareholder value.

Stoneleigh: It is interesting to note the effect of hedging in allowing companies to continue pursuing a strategy that destroys value. Being able to play with various sources of someone else's money, shareholders or otherwise, makes a great deal of difference. That money will be thrown at the latest 'big thing' during its expansion phase. But, when that money is taken off the table, the hole in the collective business case will be abruptly revealed. That is when the damage done by financialization of energy production will really become obvious.

The companies have been hedged at $7.00 for the past 5 years--they have not been suffering with $3 or $3.50 realized prices. It is against realized prices of $7 that there are no earnings and no shareholder equity. The implied warning in my post is that now, with no hedges of any value available, imagine the future of earnings and shareholder equity.

The fact is that the marginal cost is $7, the companies have no earnings and the shareholder has nothing. The manufacturing model has failed and 10s of billions of dollars have been destroyed and continue to be destroyed. I have not asked you to defend your position--what is it, by the way? That we should believe smart public companies because they have bet other people's money on something that their balance sheets don't support, but they must be right anyway?

Stoneleigh: Periods of mania, where whole industries, or even whole economies and societies, collectively take leave of their senses, generate an all-in mentality, with no safety margins and no contingency plan. The flip side of over-shooting the fundamentals during the blowing of a bubble is undershooting them when the bubble implodes, killing investment and potentially rendering most of the industry uneconomic for long enough to eliminate most of the players. Hence an industry elevated far beyond its fundamentals by ponzi finance is also destined to be consumed by it.

For many companies, there is no turning back--the entire company has been bet on the success of shale plays. This seems to violate what has been learned in the E&P business about the importance of having a balanced portfolio. In some cases, companies do not have sufficient shareholder value to justify being bought and, therefore, saved.

Stoneleigh: Art Berman is not the only knowledgeable gas industry insider to point out that the emperor has no clothes, although most of the other who share his doubts do so much less publicly. The New York Times recently published a substantial quantity of correspondence that had been sent to them by insiders extremely concerned about bubble dynamics.

No identifying whistleblower details were divulged, so that the criticism remains largely anonymous. Many people have clearly recognized the warning signals of a mania for a long time, yet very little information has emerged in the public domain until too late to preserve much value. Following the herd is the path of least resistance. Failing to do so can easily be a career-limiting move, hence the facade continues until the damage has been done, and the sector hits a brick wall at a hundred miles an hour.

Here are some of the comments from that New York Times piece::

Geologist and official from Anglo-European Energy:

After buying production for over 20 years, hopefully I know the characteristics of great wells (flat decline curves, low operating costs, large production), and as you know, the shale plays have none of these. The herd mentality into the shale will eventually end possibly like the sub-prime mortgage did. In the meantime it is very difficult to sell any kind of prospect that is not a shale play.

Analyst from PNC Wealth Management (2011):

Money is pouring in from investors even though shale gas is inherently unprofitable. Reminds you of dot-coms.

Analyst from IHS Drilling Data (2009):

The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work.

Retired geologist for major oil and gas company (2011):

As I think you would agree, we are looking at a bubble here with caveats. The caveats are how corporate hubris and bad science have caused a lot of folks to think that gas is nearly too cheap to meter. And now these corporate giants are having an Enron moment, they want to bend light to hide the truth. The bubble will burst, folks will get run over, reason will be restored, if only temporarily.

Official from Bold Minerals LLC (2010):

1. The players never did any careful regional studies before they made serious and irrevocable capital commitments to the various shale plays. Our scouting sources never got calls for logs or cores on the significant old tests, especially in the Haynesville. This was mystifying.

2. The pronouncement that the reservoir was uniform and covered 10 or 20 counties or (in the case of Marcellus) 5 states was absolute heresy in the conventional business. This very extravagant claim was never really debated or contested by the technical community. The downhole data for these broad sweeping conclusions was simply never there.

3. The escalation of lease bonuses to ridiculous heights and the taking of 3 year term leases put the companies in the position of being compelled to drill hundreds of potentially technically unsound wells with insufficient downhole information or face massive impairments by letting incredibly expensive acreage expire undrilled. In previous hot domestic plays, no major company would ever commit itself to lease positions of this scope and scale of expenditure that they could not afford to abandon if the technical picture became negative.

4. The ‘bait and switch’ where one massive set of capital outlays in the ‘best’ shale uncovered was soon to be eclipsed by the recognition of even better shales which required even more outlays before a thorough technical assessment of existing shale positions had been obtained could only be classified as a type of ‘mania’. It has no precedent in financial scale to any of the previous lease plays that experienced a speculative frenzy in domestic onshore petroleum history.

Official at Phoenix Canada Oil Company (2010):

It is my strong view that we will see a near collapse of that play, probably sooner rather than later. Perhaps we will see a repeat of the coal bed methane (CBM) play 'disappearance' -- where that 'exciting' development faded into history 'without a trace'!

Official from Schlumberger (2010):

All about making money. I'm working on a shale gas well that was just drilled in Europe. Looks like crap, but the operator will flip it based on ‘potential’ and make some money on it. Always a greater sucker....

Stoneleigh: Flipping is a key part of the dynamic, and not only in relation to the supposed gas potential, but also (if not primarily) the land. The effect on the natural gas sector is in some ways a by-product of yet another form of real estate bubble. When that bubble bursts, the carnage in the natural gas industry will be collateral damage, but with huge impact in a wider economy far more dependent on cheap and abundant natural gas than it realizes.

Returning to the broader subject of shale plays in general, why do operators keep drilling while their own over-production has depressed the price of natural gas by half of its value since January 2010? It seems fairly clear at this time that the land is the play, and not the gas. The extremely high prices for land in all of these plays has produced a commodity market more attractive than the natural gas produced.

Stoneleigh: The land element is an explicit part of the corporate strategy for gas companies. For instance, consider the transcript of a 2008 conference call between investors and the CEO of Chesapeake Energy, Aubrey McClendon (from the NY Times document trove):

Aubrey McClendon: I can assure you that buying leases for X and selling them for 5X or 10X is a lot more profitable than trying to produce gas for $5 or $6 mcf.

Stoneleigh: This is how a manic gas market can be temporarily profitable even if gas prices are low. Never mind that the short term gain for the very few comes at the expense of long term pain for the very many. Landowners are not likely to see the lease payments they were promised, investors are likely to see their supposed asset fall sharply in value, lenders will take major losses and the public will find that the low prices brought about by supply complacency do not last. In order to see why, it is necessary to examine the gas bubble in the context of the bigger picture for natural gas in North America.

Despite the advent of the horizontal fracking technology enabling the exploitation of shale gas and other unconventional sources, and a massive increase in well drilling, that peak has not been exceeded. Without new drilling, gas production would decline by 32% in a year.

In the 1990s, 10,000 wells a year were drilled. From 2006-2009 that number had increased to 35,000, but production only increased by 15%. 60% of US production in 2006 originated in wells drilled in the last 4 years, while 50% of 2007 production came from wells drilled in the last 3 years. This is an image of an industry on an accelerating treadmill, and an energy industry in trouble.

These wells are expensive, in both financial and energy terms, especially before the sweet spots have been defined for a shale play. The fracking process necessary in order to extract gas from very low permeability reservoir rock is complex and has many side-effects that must be expensively dealt with (the subject of a forthcoming post). The water requirements are huge, complicating gas production in arid areas.

The net energy for unconventional gas production is therefore much lower than for conventional supplies. In other words, a much larger fraction of the energy produced must be reinvested in energy production, leaving less as a surplus for society's other purposes. The steepness of the net energy curve prevents gas from being considered as a long-term, large-scale fuel source.

Nevertheless, the shale gas hype has led to talk of no longer needing Canadian natural gas imports or an Alaskan pipeline, and most preposterously of all to discussion of converting a proposed LNG receiving terminal into an exporting facility. The Department of Energy has called for gas to represent the cornerstone of US energy security, with 45% forecast to come from shale gas by 2035 under the Natural Gas Act 2011.

A substantial increase in electricity generation from natural gas is envisaged, and gas promoters like T Boone Pickens are calling for gas to move into transport on a large scale as well. Very substantial government subsidies are being considered for the shale gas industry, thanks to political vested interests:

Voicing strong support for the natural gas industry, a bipartisan group of eight federal lawmakers from gas-producing states sent a letter to President Obama on Monday asking him to promote continued natural gas development "by any means necessary, but most specifically, by unconventional shale gas recovery."

"The need for the United States to move toward energy independence becomes more crucial as the crisis in the Middle East and North Africa worsens," the letter said.

Stoneleigh: Unfortunately, throwing money at a net energy issue will not solve the problem, and in times when money is scarce it will be even more problematic. For production to be maintained, drilling must continually accelerate, but gas prices are so low on the perception of glut that this is exceptionally unlikely. The bursting of the gas bubble will suck most of the project finance out of the sector for a period of time. We can therefore expect gas production to decline sharply in the coming years. Gas declines from a production peak are typically sharper than oil declines, so the change could be quite rapid.

Although demand will soften under the depression conditions for which we are headed, natural gas should receive considerable relative price support in a deflationary environment. The bust part of the cycle is happening earlier than for oil, and by the time we find ourselves in depression, a gas supply crunch could already be underway due to the effects of several years of low prices and so many losses coming home to roost in the aftermath of the shale gas mirage. In North America, gas supply could therefore be a much more immediate concern than oil supply.

Consider one very telling comment from the NY Times trove of shale gas correspondence, which casts light on the shale gas boom in context of the conventional gas situation:

I don’t think the driving force here was just the seductive story of an infinite supply of ‘manufactured gas’ with no risk and assured margins. Nor was it simply the greed of the investment bankers and company executives for fees and windfalls on stock options. Because the thing took off on a wing and a prayer. It was a dubious proposition from the outset.

The indicators of a potential disaster which I set out above would be obvious to any senior manager in an oil company. They were flashing warning lights, so why was caution thrown to the wind? Desperation. The conventional exploration game has gotten so tough domestically that managements were willing to grab on to anything that offered a prospect of replacing reserves.

The outlook for conventional exploration is just so grim domestically and the carefully concealed pessimism was so profound at most companies the shale story took hold because it offered a hope to domestic companies of ending the death spiral of continual declining production and enormous losses on failed exploration projects.

Stoneleigh: An energy crisis is not a distant possibility, but a very real threat over the next few years, likely beginning with natural gas. We are in for a shock.

Before we all join the chorus of abuse against the robber agencies, let us not lose sight of what is happening in the eurozone. The EU authorities are attempting to muzzle free opinion, first by threatening Fitch, Moody’s, and S&P with vague retribution, and then by drafting restrictive laws to prevent them from publishing unwelcome messages. It is financial repression, pure and simple. The same will be done to the press in due course. Then to you, dear reader.

"We must break the oligopoly of the rating agencies," says German finance minister, Wolfgang Schäuble. By "we", of course, he means the EU apparatus of coercion. The European Commission has already created a pan-EU oversight body with binding powers to breathe down the necks of these agencies. It will draft restrictive legislation by the end of the year. The Portuguese downgrade ensures that it will be even nastier." Developments since the sovereign-debt crisis show we need to take a further look at reinforcing our rules," said Commission chief Jose Manuel Barroso.

Mr Barroso came close to accusing the agencies of cartel activities and a malicious agenda. "It’s quite strange that the market is almost dominated by only three players. It seems strange that there is not a single rating agency coming from Europe. It shows that there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe."

Leaving aside the not-small matter that Fitch is owned by the French group Fimalac (quoted on the Paris bourse), or that it is largely run by Britons who belong to the EU and contribute to Mr Barroso’s salary, this talk of anti-European bias cannot pass unchallenged.

Currency unions switch exchange risk into default risk. The rating on countries in currency unions ought to be lower therefore (ceteris paribus). States with their own sovereign currency and debt in their own currency can let the exchange rate take the strain when they get into trouble, as the US and the UK have done. Foreign investors lose money on the exchange rate. There may be all kinds of risks and dangers in the US and the UK, but default is not high on the list (discounting the US soap opera over the debt ceiling).

This not the case at all for EMU laggards. They cannot devalue or inflate away debt. The stress shows up in the bond markets instead. The more relevant comparison in this respect is between the Euroland’s Club Med states and California. The Anglo-Saxon agencies do not rate many US states at AAA. California is A- and may lose that soon enough.

To compare the ratios of national debt to GDP levels in the Anglosphere with those in Europe, as the EU elites tirelessly do, is to the miss the point. My gripe against the agencies is not that they are downgrading all these semi-bankrupt states today, but that they totally failed to signal the inherent dangers of EMU a long time ago when the crucial investment decisions were being made. They too were swept up by euro euphoria. They too failed to understand the inherent structure of monetary union, or to spot obvious warning signs as the drama unfolded and the North-South divide became ever-more apparent. They handed out AAAs like confetti.

That is the great indictment of Fitch, S&P, and Moody’s in this sovereign saga, especially Moody’s (which has since replaced much of its French-led sovereign team). Moody’s still had a A3 rating on Greece in May 2010. Unbelievable.

I have great sympathy for the Portuguese. They did not have a demented credit and property boom during the roaring noughties (yes, they did earlier). They did not cheat on the deficit figures. They do indeed have bloated a public sector but basically the cause of their disaster is having locked into EMU in the mid-1990s before they were ready. They lost control of monetary policy and have been the victims of a dysfunctional currency union ever since.

Parts of their light manufacturing industry have been wiped out by Chinese imports, flooding Portugal at an exchange rate of 9 or 10 yuan to the euro. Portugal needs a 50pc devaluation against China. The Portuguese have shown impressive stoicism since the crisis erupted. They have knuckled down under the new free-market government of Pedro Passos Coelho, complying diligently with the demands of the EU/IMF inspectors. (Pointlessly, in my view. They should simply leave the euro and put an end to the misery. But that is another matter.)

Yet, out of the blue, Moody’s cuts them four notches to junk status, and precipitates an explosive rise in yields across the maturity curve. A "punch in the stomach" said Mr Passos Coelho. Indeed.

But let us be clear. The EU itself brought this about by declaring war on the very investors needed to finance the vast borrowing needs of the European project. By baying for the blood of bankers and "speculators" (ie pension funds and the like who bought Greek, Portuguese, and Irish debt in good faith), Chancellor Merkel has set off capital flight and raised the spectre of defaults. Her specific demands for "burden-sharing" by Greece’s private creditors (and therefore Portugal and Ireland next) have changed the landscape. The agencies have no choice at this stage. Their job is signal default risk.

The ECB has warned tirelessly that attempts to punish investors in this fashion would back-fire horribly, set off a fresh contagion, and potentially spiral out of control. This is where we are today as Club Med bond yields go haywire again. Governments need to love and caress bond-holders, not spit at them. By the way, holders of Greek and Portuguese long-term debt have already lost half their money based on current resale values.

What should have been done is obvious. The EU’s bail-out fund should have been given powers mop up the bonds of countries in distress on the open market at a hefty discount (as the ECB suggested). Investors would have suffered condign losses, and the EU could have given Greece debt relief by retiring bonds with no net loss to European taxpayers.

This elegant solution was blocked by Germany because it was seen as a slippery slope towards a Transfer Union, and might have violated the Grundgesetz. (In a sense the Germans are right, but you shouldn’t join a currency union in the first place if don’t realize that it implies fiscal union.)

Now, if the EU institutions wish to avoid being held hostage by the robber agencies they should stop using the ratings as a basis for lending collateral at the ECB. They should create their own more rigorous method of assessing credit-worthiness, ignore the agencies altogether, and make their case directly to global investors. What the EU should not do is try to muzzle free opinion, or free speech. We are on a slippery slope.

Under normal circumstances, the decision of the ECB to raise interest rates by 0.25 per cent at a time when the European economy is slowing, and inflation seems to be peaking, would have been a very big deal. However, with the peripheral debt crisis still deteriorating, the rate increase has not really been the centrepiece of market attention today.

Instead, the main focus is on the composition of the ECB’s balance sheet, where a much larger, if slower moving, story is unfolding. The ECB is gradually being drawn into the “socialisation” of peripheral country debt, in ways which are completely outside the control of the central bank, and which could yet end in crisis.

Today, the ECB decided to continue accepting Portuguese debt as collateral for repo operations, even though Portugal has been downgraded by Moody’s this week. The ECB is increasingly taking actions which they would have deemed unthinkable two years ago. But they are trapped, and will remain trapped until there is a more comprehensive solution to the peripheral debt crisis.

The case for a rise in interest rates in the eurozone was discussed in this previous blog in April. This pointed out that the margin of cyclical unemployment in Europe is much smaller than it is in the US, which implies that the “correct” level for short rates (as indicated for example by the Taylor Rule) is higher in the case of the ECB than it is for the Fed. However, since April, industrial production in the global economy has slowed, and there has been a notable drop in eurozone consumers’ expenditure in Q2. In addition, inflation in the eurozone has stabilised, after a succession of disappointing data releases early in the year. Given this latest economic evidence, my own vote today would have been for no change in rates, but at least the ECB board has not indicated that any further rate rises are just around the corner.

All of this is, however, a sideshow compared with what is happening to the ECB’s balance sheet. As the private financial market has progressively withdrawn funding from the banking systems of Greece, Ireland and Portugal, the ECB and its constituent national central banks have been sucked into replacing the lost capital on an increasingly alarming scale.

The banking sectors in the three most troubled economies have been unable to issue bonds with a maturity of greater than 12 months since the crisis blew up in 2010. Furthermore, the private repo market has largely dried up, implying that banks in the troubled economies have had to turn to the ECB as the only source of available liquidity.

All of this is now fairly familiar, but the important point is that it is still showing no sign of any improvement, even though the EU is preparing to release the latest round of emergency funding for Greece. Martin Wolf’s column explained in considerable detail yesterday why the European rescue operation has so far failed to persuade the government bond markets that the troubled economies are moving back towards solvency. In fact, it is the reverse.

The banking markets have drawn the same conclusion. The imposition of additional, increasingly onerous, fiscal tightening on chronically weak economies seems to be raising, rather than lowering, the market’s assessment of sovereign default risk. And that has made it harder to imagine any improvement in the private funding of the banks, which are large holders of sovereign debt, and need to use it as collateral in repo operations.

As a result, the ECB has had to provide open ended liquidity, or face the certain failure of the banking sectors in the peripheral countries. The ECB is now financing around 20 per cent of the balance sheets of Greek and Portuguese banks, and has a total exposure to the troubled economies in excess of €400bn. Not all of this would be ultimately written off in the event of sovereign defaults. But the capital and reserves of the European System of Central Banks is only €81bn, so recapitalisation of the central banks could easily become necessary. As a result, much of the risk which has been taken on by the ECB would be “socialised” or “communitised” across the taxpayers of the EMU nations.

As if that were not enough of a problem, there are signs of a further, and even less controllable, problem emerging. Ordinary bank depositors in Greece and Ireland are beginning to shift their money out of the retail banks. Fearful of bank failures, and/or the break-up of the euro followed by currency devaluations, people are either hoarding cash under the mattress, or seeking safer havens like bank accounts in Germany.

Nicola Mai of JP Morgan has produced a neat graph on the extent of this bank deposit flight, which is reproduced below:

Since the beginning of the crisis, the Greek and Irish banking institutions have lost about 15 per cent of their retail deposits. The consequence of this bank run is that the ECB has had to replace this source of bank funding as well. The pace of withdrawal of bank deposits in Greece and Ireland is not quite as fast as that which occurred during the Argentinian crisis in 2000-02, and has not shown any sign of recent acceleration, but it adds a volatile and unpredictable element to the crisis.

As the UK government found in the case of Northern Rock, the appearance of queues outside banks is one of the worst nightmares which a central bank can face. It has not happened in Europe – yet.

Moody's says a third of the 91 banks in Europe likely to need external support in a financial crisis

Almost a third of the 91 banks in Europe subjected to tests of their ability to withstand shocks to the financial system are likely to need some form of external support, says the ratings agency Moody's. While Andrea Enria, the chairman of the European Banking Authority, last week insisted it was impossible to speculate on the number of banks that would fail the Europe-wide stress tests, Moody's has used its credit ratings to assess the outcome.

A week before the results are expected to be released by the EBA, Moody's estimated that 26 of the banks "have a heightened risk of needing extraordinary external support" to protect their capital buffers. It emphasised that the tests needed to be credible if banks were to have the ability to raise extra funds on financial markets. However, no British banks are thought to need extra capital. Bank share prices are already under pressure after Moody's suddenly downgraded Portugal to junk status for fear it would need to renegotiate its bailout.

Last year's stress tests were called into question after Ireland's banks needed to be bailed out within months of being given a clean bill of health. Only seven banks failed last year.Moody's took some comfort that the tests – based on worst-case scenarios – were stricter than the 2010 ones, but noted that the EBA's 2011 stress assumptions do not assume a sovereign default at a time when the risk of such a default within the eurozone has increased.

The agency believes that more bond holdings will be covered this time, as only 20% of exposure to sovereign debt was covered by last year's tests. The test are based on the crucial core tier one capital falling below 5% under at least one of the worst-case scenarios, which include a drop in GDP over two years of 4%, compared with 3% for last year's tests.

Moody's is unlikely to change its own ratings on banks as it expects the non-rated banks to fall into the category of needing some form of external help. "Other things being equal, banks assigned a stand-alone rating of D+/Ba1 or below could be expected to be the most vulnerable to shocks. Consequently, while we would not expect all such banks to fail the test, we do expect that the banks that fail the EBA stress test will likely be among Moody's lower-rated banks or among the unrated banks," Moody's added.

A chorus of policy-makers from Europe and across the world have denounced Moody's drastic downgrade of Portuguese debt as an act of financial vandalism, accusing the "Anglo-Saxon" rating agencies of driving states into bankruptcy and destabilising the global system.

Wolfgang Schauble, German finance minister, said there was no justification for the four-notch downgrade or for warnings that Portugal might need a second bail-out. "We must break the oligopoly of the rating agencies," he said. Heiner Flassbeck, director of the UN Office for World Trade and Development, said the agencies should be "dissolved" before they can do any more damage, or at least banned from rating countries.

Moody's downgrade late on Tuesday set off immediate contagion to Ireland, with dangerous ripple effects across southern Europe. Yields on Irish two-year bonds surged above 15pc of the first time. Italian borrowing costs reached levels not seen since the aftermath of the Lehman crisis in late 2008. Yields on Spain's 10-year bonds jumped 12 basis points to 5.59pc.

David Owen, of Jefferies Fixed Income, said concerns are growing the crisis could spread to bigger economies as growth falters across Europe's southern arc. "The risk of cross-over into Spain and Italy is very serious. The fear is what will happen if Spanish 10-year yields rise above 5.7pc and stay there for a few weeks. Spain also has €2.5 trillion of private sector debt, and a rise in rates risks pushing the country into recession."

Portugal's new premier, Pedro Passos Coelho, said Moody's downgrade was a "punch in the stomach" at a time when the new government has done everything demanded by the EU/IMF inspectors. The rating agency said it had little choice once EU leaders began to insist on "burden sharing" for private holders of Greek debt, raising the spectre of default. It is almost certain any Greek formula will be extended to Portugal.

The European Central Bank has cautioned EU leaders from taking a hard line on private creditors, warning it would destroy confidence among the very investors needed to fund Europe's deficits. The net effect would be destructive. This is exactly what has occurred.

The Institute of International Finance (IIF) representing 400 global banks has floated the idea of a bond "buy-back" on a voluntary basis that would help Greece lower its debt burden, but this has not been enough to satisfy German demands for more creditor pain. The IFF said yesterday it was studying a "menu of options to help Greece", including variants of a complex French plan for debt rollovers. The original plan was widely deemed too harsh on Greece.

Jose Manuel Barroso, the European Commission president, questioned Moody's motives and said it had fanned the flames of "speculation" with an unwarranted downgrade. "It seems strange there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe," he said, seemingly unaware that Fitch Ratings is French-owned.

The Commission is drawing up laws to clamp down on the agencies. These will now be tougher. "Developments since the sovereign debt crisis show we need to take a further look at reinforcing our rules," said Mr Barroso.

The EU's richer nations must admit that they made bad decisions when they bought peripheral sovereign debt

There is a growing sense of despair in Brussels. Unlike previous attacks on the euro project, the latest downgrade of Portugal's debt by the ratings agency Moody's feels like the beginning of the end. Those economists and fund managers who argued that a second bailout for Greece with private sector involvement would mean something similar for Portugal and most likely Ireland are hitting their target.

Like a 19th century battalion holding the line against oncoming hoards with depleted firepower and an officer class at war with itself, the euro's supporters are in a desperate situation.

Since last year's Greek debacle, European leaders have sought to provide lifelines to the worst hit countries by replacing the private debt markets with the European Central Bank. The ECB now holds almost £100bn of Greek debt. Portugal was in much the same position, but hoped to muddle through its crisis with just one bailout from Brussels. Moody's says it is likely to join Greece in a second bailout because, like with Greece, private lenders are going to stay away for longer than expected.

Investors ask why they should buy the bonds issued by a country that will be forced to change the terms for the worse mid way through the life of the loan. That is what Brussels is contemplating for Greece. Moody's naturally assumes the same will be imposed on Lisbon. Just as we found in the worst period of the banking crisis, attempts by politicians to save money and preserve asset values only make the situation worse.

The UK government was urged to nationalise the worst hit banks almost as soon as Northern Rock collapsed, but did everything it could to avoid recognising the problem and when it did, it tried mergers and loans coupled with austerity to minimise the effect on the state. Lloyds was encouraged to merge with Halifax and when that failed it was told to use an injection of government cash, to be repaid, as a way to slim down. Now Lloyds, like most of our banks, are zombie institutions unable to help the UK economy get back on its feet.

The same recipe is being lined up for Greece and soon for Portugal. Moody's recognises this unpalatable fact and says it fears "Portugal will not achieve the deficit reduction target – to 3% by 2013 from 9.1% last year as projected in the EU-IMF programme – due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system."

It then lists four main areas of concern. The first centres on the ability of Lisbon's new government to make promised cutbacks in sectors such as healthcare, state-owned enterprises and regional and local governments. Delays in tackling tax avoidance, the possibility of a further bailout of local banks and limits on economic growth also sow the seeds of doubt that Portugal can make it through the next few years without extra loans.

Like the worst-hit banks, Portugal, Ireland and Greece are bust. To get them back on their feet there is a moral case for including private sector investors in further bailouts. Why should governments bear all the burden? It's a fair question, but that road leads to disaster. Even though many private investors in eurozone sovereign debt are EU banks and pension funds, and you might think a force for good, they have no other motive than to maximise returns. They will listen to Moody's fears and scram at the first time of trouble.

This contagion effect is real and economically ruinous. In Japan, businesses, politicians and academics are permanently worried about Greece. US policymakers likewise. Stocks fell in New York in the hours after the Portugal downgrade because the possibility of another Lehman Brothers felt real. The only answer is for the EU richer nations to admit that they made bad decisions when they bought peripheral sovereign debt. It was not a risk-free bet. It turned bad and their assets are only worth 20 or 30 cents in the euro.

The French and Germans, in particular, have rather smugly portrayed themselves as wiser than everyone else during the financial crisis. That somehow their adherence to a regime of "conservative" bond purchases allowed them to avoid the problems visited on the US, Britain and most other European nations.

If anything it is the opposite. They are up to their necks in bad debts, just as much as the UK: it's just that their debts relate to bad loans made to Greece, Portugal, Ireland and Spain, and not housing developers or buying exotic financial derivatives.

Spain is often talked about as the next domino. On Tuesday ugly economic figures for Italy appeared to put Rome higher up the scale of walking disasters. Unless Brussels admits the full extent of the problems blighting Greece and Portugal, the panic will spread, hurting all of us.

As Bank of England governor, Sir Mervyn King, keeps insisting, the European crisis is not one of liquidity. It is a full-blown debt crisis. Therefore, offering more loans, especially at outrageously high interest rates as Brussels intends to do, fails to tackle the core problem, it only makes the situation worse.

Giulio Tremonti is a crucial figure in Silvio Berlusconi’s conservative government: a guarantor for the markets of the fiscal rigour that has so far kept Italy out of the debt crisis sweeping the euro zone periphery. Until now, moreover, Mr Tremonti has been untainted by the financial and sexual scandals that have besmirched the prime minister and several members of his administration.

But on July 7th a scandal involving allegations of graft in high places came uncomfortably near his door. It was announced that judges in Naples had issued an arrest warrant for one Marco Milanese, a lawmaker accused of corruption who, until nine days earlier, was Mr Tremonti’s political adviser and one of his closest associates. Worse was to come. Since Mr Milanese is a member of the Chamber of Deputies, the lower house of the Italian parliament, he cannot be arrested immediately and so the prosecutors have had to apply to parliament for leave to proceed.

According to Italian media reports, the documents accompanying their request showed that Mr Milanese was paying the €8,500 ($12,200) a month rent on the apartment used by the finance minister in Rome. Shortly afterwards, Mr Tremonti issued a statement acknowledging that he had “accepted the offer made to me by [Mr] Milanese for the temporary use of part of the property”. He said that, after finding out about the prosecutors’ initiative, he would change his arrangements “as of this evening”.

It remains to be seen whether that will be enough to distance him from a scandal that clearly has a long way yet to run. In an earlier statement of their own, the prosecutors said Marco Milanese was wanted on suspicion of having supplied confidential official information to a businessman in return for “significant cash payments and other gifts such as expensive watches, jewels, luxury cars (Ferrari and Bentley) and holidays abroad”. He was also alleged to have given jobs in firms controlled by the finance ministry to two other men in return for favours.

Caught on cameraThe arrest warrant for Mr Milanese was the latest in a string of embarrassments for the finance minister this week. Earlier in the day, the web site of La Repubblica, a daily, made available a video recording of a press briefing by ministers in which Mr Tremonti was unwittingly caught describing one of his cabinet colleagues as a “moron”.

The briefing was held to provide details of a four-year, €40 billion package of deficit-cutting measures drawn up by the Treasury. On July 4th it was discovered the bill contained a measure—subsequently withdrawn—that would have allowed Fininvest, the core firm in Mr Berlusconi’s business empire, to suspend the payment of compensation of up to €750 million. Mr Tremonti has since intimated that the clause was sneaked into the legislation by the prime minister’s office. But Mr Berlusconi said it had been discussed in cabinet and that his finance minister had regarded it as “sacrosanct”.

by Economist Berlusconi's bung: The failure of a shameless budget manoeuvre by the prime minister

Nothing illustrates better the gulf between Italy’s multi-billionaire prime minister, Silvio Berlusconi, and the people that he governs than the impact of Italy’s emergency budget, introduced on June 30th. For most Italians, it meant sacrifices running to hundreds of euros. For Mr Berlusconi, it promised savings of hundreds of millions.

In total the cabinet approved deficit-cutting measures of €40 billion ($55 billion). The finance minister, Giulio Tremonti, wanted to dispel any spectre of a Greek collapse in Italy. But he is under pressure, especially from Mr Berlusconi’s coalition partners in the Northern League, to consider the political consequences. Alarmed by the ruling parties’ dismal showing at local elections in May, the League’s leader, Umberto Bossi, has called for a U-turn: tax cuts funded by drastic cuts focused on defence spending.

The four-year austerity budget is a compromise. Mr Tremonti got his deficit reductions. Yet all but €6 billion of the tax rises and spending cuts will take effect after 2012, hinting that there may be an election next year, before they bite. Mr Bossi got a promise of lower income tax, accompanied by a hint that the shortfall may be made good by a gradual rise in VAT.

That would hit the poor harder than the rich. But as the details became known, there was even worse news for the less well-off, including many of Mr Berlusconi’s (and even more of Mr Bossi’s) voters: increased health charges and a freeze on cost-of-living increases for higher-value state pensions. More cuts must be made by local and regional authorities, which are set to lose €10 billion in central-government transfers. The budget also includes a rise in the flat-rate stamp duty on government bonds that have for years formed the core of every middle-class Italian saver’s portfolio, which could sharply reduce their net returns.

These are tough times in southern Europe. Italy’s public debt will top 120% of GDP this year. It cannot afford to run a big deficit. The government argues that everyone must bear some pain. Unsurprisingly, then, there was outrage (even privately among ministers) when it emerged that, for the prime minister himself, the budget contained not pain but an analgesic of monstrous proportions.

The biggest threat to Mr Berlusconi was never his various trials, even if some could still cause trouble. His main financial worry is a civil action brought against Fininvest, the firm at the heart of his business empire, by a company belonging to his long-standing rival, Carlo De Benedetti. The case arose after the battle over Mondadori, Italy’s biggest publishing house, in the early 1990s. Three Fininvest lawyers were found to have bribed a judge for a favourable court verdict. Mr De Benedetti wants compensation. A lower court decided he should have €750m: big bucks, even by Mr Berlusconi’s standards.

A clause tucked into the 100-odd pages of the emergency budget offered him some respite by letting any defendant liable to pay compensation of more than €20m suspend payment until completing Italy’s two-stage appeal procedure. In a system notorious for delay, that could take years. Amid reports that neither Mr Tremonti nor the League was told of this clause, the prime minister withdrew it, decrying his critics’“shameless exaggeration”. Even before this week, it was not easy to see how Mr Berlusconi could reverse the steady decline in his popularity in time for the next election. Now it looks harder.

Eurozone finance ministers are sharply divided over how to handle the spiralling Greek debt crisis, Dutch finance minister Jan Kees de Jager revealed as he attacked France's plans for a new rescue package.

Speaking in London after a meeting with the chancellor, George Osborne, de Jager said it was "illusory" to hope that Europe's banks would voluntarily bear their fair share of the costs of a new bailout for Athens, and that President Sarkozy's current proposals let Greece's private sector creditors off too lightly.

Any evidence of a fresh split among European policymakers will increase anxiety in the financial markets, which were rattled on Wednesday by news that ratings agency Moody's had downgraded Portugal's debt to junk status. "We do have concerns about the French scheme," de Jager said. "I think it's illusory to think of such a scheme as voluntary, so we have to work on solutions so that banks reach a level playing field." As a non-eurozone member, Britain is on the sidelines of talks about a new bailout for Greece, but de Jager said Osborne was "very close to our position".

The cost of insuring Portuguese government debt through credit default swaps hit a record high after the downgrade, while the yield on Portuguese 10-year bonds jumped by more than a percentage point to 12.07%, ratcheting up the pressure on Lisbon.

European commission president José Manuel Barroso criticised Moody's announcement, saying: "In this context, and the absence of new facts on the Portuguese economy that could justify a new assessment, yesterday's decisions by one rating agency do not provide for more clarity. They rather add another speculative element to the situation."

Sarkozy sought to quell the rising panic in markets last month by announcing he had persuaded French banks to play their part in a new bailout package for Greece by swapping their outstanding bonds for new long-term loans. Germany's banks later said they would join in, and European bankers were meeting in Paris on Wednesday to hammer out the details of a deal.

But ratings agency Standard & Poor's said on Monday that it would consider the complex debt-swap proposed by the French to be a "selective default" – a decision that would have damaging knock-on effects throughout financial markets.

The European Central Bank has warned that if other ratings agencies echo S&P's judgment, it could be forced to stop accepting Greek bonds as collateral, jeopardising the solvency of parts of the European banking sector.

But de Jager said the French plan lets the banks off too lightly, and unless finance ministers impose bigger losses on them, Europe would be "converting private debt into public debt" by lending Greece more money from European taxpayers to pay back bondholders.

Sony Kapoor, of the Brussels-based thinktank Re-Define, said the current plan would have all the disadvantages of a default without actually reducing Greece's debt. "The appearance of private-sector involvement is far more important to EU leaders than the actual fact of it," he said. "We are in the worst of all worlds. The EU and Greece have paid most of the costs that would result from any restructuring of debt without realising any of the upside in the form of a reduction of risks to EU taxpayers or a restoration of debt sustainability in Greece."

Despite the ongoing crisis, the ECB is expected to go ahead with a planned increase in interest rates tomorrow, increasing the pain for recession-hit Greece and Portugal. Higher eurozone interest rates also feed through to the rate Greece, Ireland and Portugal pay on bailout loans.

De Jager showed little sympathy for the plight of Greece, however. "Contagion risks are not best handled by bailout funds, or by being soft on each other, but by taking strong measures," he said. "The size of the government needs to decrease in these countries."

He denied that would mean abandoning the cherished European social model. "These economies could be European in the traditional sense, but without the rigid labour markets and rigid monopolistic structures that go with it, especially in the southern European countries. They have to be torn down."

He said he was trying to build a coalition among sympathetic eurozone governments, including Germany, to demand greater private-sector involvement in any new rescue package. Greece is expected to need a fresh bailout of up to €120bn, but finance ministers are not expected to reach a final agreement until the autumn.

De Jager backed Britain's argument that the European commission's demand for an increase in its budget was unacceptable. The Dutch parliament has called for the EU budget to be frozen in cash terms – even tougher than David Cameron's argument for a real-terms freeze. "We are in agreement," de Jager said.

Robert Pretcher said himself in a video that although he may sound like an extremist - he expects home prices to eventually collapse to 90-95% devaluation of it's highest peak. He also expects deflation. Why? Because although the money supply is very high - you have to understand that the debt on that money supply is close to 8-10 times its size.

Where did that debt come from? From easy credit to anyone. I believe a lot of people don't understand that US has already gone through inflation.... When? Through the bubble years when everyone was spending on credit cards, easy mortgage to anyone, excessive student loans, & excessive business expansion.

Banks do not really lend you the money. They only pretend to lend you the money as if they actually have that money in reserve when they actually do not. They are allowed to lend I believe 8 times more than they actually have in reserve.

This effectively means that a bank is pretending to lend you money which you believe is actually available in the monetary supply within a economic system - when truthfully that money never existed in the first place - it was electronically credited out of nowhere - basically electronically printed when you were approved for a loan which you applied for (mortgage, college loan or business funding) - and then electronically credited to you.

You are basically fooled into believing you owe the bank money - when you don't because they didn't actually take that money available in the monetary supply within a economic system - instead they electronically printed about 80% of your "loan" themselves - while they only really actually lent you 10-20% of the "loan".

Let me get to the main point: The bankers have effectively made people chase $14-20 trillion dollars actually available within the economic system to pay off $140-160 trillion... How does that work? It doesn't!

This formula makes individuals in a economic system chase after money - money becomes scarce - even though the supply of the money is quite high and it is backed by nothing - the debt accumulated is so many times greater than the supply available.

This mathematically creates a depression and deflation by manipulating the supply of money within an economic system while at the same time manipulating the debt within an economic system - so the debt is many times more than the supply.

Now that the banks are no longer "lending" (counterfeiting) much.... The defaults just keep piling up - and that's exactly what mathematically has been engineered.

Though the government is in the mortgage and loan business now. I understand that haven't fully close their own "lending" (counterfeiting) however once Freddie & Fannie along with Sallie is ended - expect the defaults to skyrocket & the contraction of the economy to increase many times - because then you can no longer pay off debt from more debt.

First you will have deflation - then after all the defaults, bankruptcies & foreclosures have been processed through - maybe in 2-10 years depending on how things proceed - you will have MASSIVE inflation due to the supply of the money and the fact that it is backed by nothing. The dollar is definitely not stable however understand other currencies are much worse in how solid they are.

Deflation is what will hurt most Americans not inflation in my humble opinion. Inflation will help americans to easily pay off their mortgages, student loans, & credit cards. This will free them from debt slavery while at the same-time allow them to keep their homes and have businesses create jobs.

Inflation will hurt savers though - but savers are very few in this economy and it is actually very tough for most americans to save money even though a lot of them are trying to cutback on useless luxuries. Most americans are either under debt or live paycheck to paycheck from being homeless.

What I am saying is exactly what happened in 1929-1933. Too much debt with very little money available to pay it off. The federal reserve also contracted the money supply which worsened things even more. The United States of America has been hijacked by wall street & international bankers, I'm sorry but that is just the cold hard truth...

The stimulus & bailouts were just to temporary - once QE2 ends in June 30 (10 days from now) - if nothing else is done to get more money into the system - the whole thing is going to collapse eventually when you go by the math. Math never lies - opinions do.

The bankers did exactly the same-thing in 1929 - put a little bit of money in the stock market to keep things a little bit afloat after a major crash - then in 1933 pull out the money - triggering a much bigger crash... The same game it seems they are playing - just on a much larger scale - which will make the collapse worse.

Stock market is rigged - get out of it. It's not worth it if the bull runs continues - too much risk - if you still make money - good for you but understand that you are taking a lot of risk when you should consider protecting yourself. Also whenever the stock market crashes - New York State real estate collapses but the collapse of that market spreads a bit to other markets.

What do you think about my perspective? With these factors in mind of what the banks have done - I can confidently say that the housing market definitely is in risk of falling 90-95% - even though that may sound extreme - when you look at the math behind it - it is actually very logical. Again - Math doesn't lie, opinions do.

Sure gas prices are rising along with groceries and utilities but that is not a full perspective in my humble opinion of inflation vs. deflation. I do think that eventually they will those prices will fall down. In April 2008 -gas was rising but then it fall. I believe it's simply up temporarily due to artificial prop ups to the economy by the government. Grocery stores by the way are losing money.

I do believe that both inflation and deflation will happen - just at different times. And maybe also even with different necessities possibly. Though generally I believe all asset prices and commodity prices will deflate but then inflate.

Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade.

The move, disclosed in the BIS’s annual report, marks a sharp reversal from the previous year when central banks added to deposits of gold at the so-called "bank for central banks" rather than lending it directly to the private sector amid growing concerns over counterparty risk.

Central banks and other official institutions collectively hold about 30,000 tonnes of bullion in their reserves, and many seek to earn an income on their gold by lending it out, just as any other currency. However, demand to borrow gold has fallen sharply in the past decade, driving interest rates on gold lending to record lows.

Hedging by gold miners, which is typically structured to involve borrowing gold, was traditionally the largest source of demand. But since miners have cut back their hedging programmes to almost zero, the gold lending market, which is mediated by large bullion-dealing banks, has dwindled. Lending gold for six months earned a rate of 0.1 per cent on Thursday, according to benchmark market assessments published by the London Bullion Market Association.

In response to e-mailed questions, the BIS confirmed that the fall in the value of gold deposits disclosed in its annual report represented "a shift in customer gold holdings away from the BIS". "The Bank’s gold deposit liabilities declined by around 635 tonnes between 31 March 2010 and 31 March 2011," it added. Comparison with previous annual reports showed the withdrawal was the largest in at least 10 years.

Traders said the move of gold holdings away from the BIS probably reflected a combination of factors. Some central banks, unimpressed with the paltry interest rates on offer, may have taken the decision not to lend their gold at all. "My perception is there’s less and less gold being put out by the central banks into the gold market," said one banker.

However, some central banks may have rediscovered an appetite for lending gold to the private sector, which can earn higher rates depending on the credit rating of the counterparty and structure of the transaction.

"As commercial banks’ balance sheets have started to look better there may have been a switch back to lending to the private sector," said Philip Klapwijk, executive chairman of GFMS, a consultancy. "Yield enhancement can be a powerful inducement to a central banker," an industry executive added.

The last financial crisis isn’t over, but we might as well start getting ready for the next one.

Sorry to be gloomy, but there it is. Why? Here are 10 reasons.

1. We are learning the wrong lessons from the last one. Was the housing bubble really caused by Fannie Mae, Freddie Mac, the Community Reinvestment Act, Barney Frank, Bill Clinton, “liberals” and so on? That’s what a growing army of people now claim. There’s just one problem. If so, then how come there was a gigantic housing bubble in Spain as well? Did Barney Frank cause that, too (and while in the minority in Congress, no less!)? If so, how? And what about the giant housing bubbles in Ireland, the U.K. and Australia? All Barney Frank? And the ones across Eastern Europe, and elsewhere? I’d laugh, but tens of millions are being suckered into this piece of spin, which is being pushed in order to provide cover so the real culprits can get away. And it’s working.

2. No one has been punished. Executives like Dick Fuld at Lehman Brothers and Angelo Mozilo at Countrywide , along with many others, cashed out hundreds of millions of dollars before the ship crashed into the rocks. Predatory lenders and crooked mortgage lenders walked away with millions in ill-gotten gains. But they aren’t in jail. They aren’t even under criminal prosecution. They got away scot-free. As a general rule, the worse you behaved from 2000 to 2008, the better you’ve been treated. And so the next crowd will do it again. Guaranteed.

3. The incentives remain crooked. People outside finance — from respected political pundits like George Will to normal people on Main Street — still don’t fully get this. Wall Street rules aren’t like Main Street rules. The guy running a Wall Street bank isn’t in the same “risk/reward” situation as a guy running, say, a dry-cleaning shop. Take all our mental images of traditional American free-market enterprise and put them to one side. This is totally different. For the people on Wall Street, it’s a case of heads they win, tails they get to flip again. Thanks to restricted stock, options, the bonus game, securitization, 2-and-20 fee structures, insider stock sales, “too big to fail” and limited liability, they are paid to behave recklessly, and they lose little — or nothing — if things go wrong.

4. The referees are corrupt. We’re supposed to have a system of free enterprise under the law. The only problem: The players get to bribe the refs. Imagine if that happened in the NFL. The banks and other industries lavish huge amounts of money on Congress, presidents and the entire Washington establishment of aides, advisers and hangers-on. They do it through campaign contributions. They do it with $500,000 speaker fees and boardroom sinecures upon retirement. And they do it by spending a fortune on lobbyists — so you know that if you play nice when you’re in government, you too can get a $500,000-a-year lobbying job when you retire. How big are the bribes? The finance industry spent $474 million on lobbying last year alone, according to the Center for Responsive Politics.

5. Stocks are skyrocketing again. The Standard & Poor’s 500 Index has now doubled from the March 2009 lows. Isn’t that good news? Well, yes, up to a point. Admittedly, a lot of it is just from debasement of the dollar (when the greenback goes down, Wall Street goes up, and vice versa). And we forget there were huge rallies on Wall Street during the bear markets of the 1930s and the 1970s, as there were in Japan in the 1990s.

But the market boom, targeted especially toward the riskiest and junkiest stocks, raises risks. It leaves investors less room for positive surprises and much more room for disappointment. And stocks are not cheap. The dividend yield on the S&P is just 2%. According to one long-term measure — “Tobin’s q,” which compares share prices with the replacement cost of company assets — shares are now about 70% above average valuations. Furthermore, we have an aging population of Baby Boomers who still own a lot of stocks, and who are going to be selling as they near retirement.

6. The derivatives time bomb is bigger than ever — and ticking away. Just before Lehman collapsed, at what we now call the height of the last bubble, Wall Street firms were carrying risky financial derivatives on their books with a value of an astonishing $183 trillion. That was 13 times the size of the U.S. economy. If it sounds insane, it was. Since then we’ve had four years of panic, alleged reform and a return to financial sobriety. So what’s the figure now? Try $248 trillion. No kidding. Ah, good times.

7. The ancient regime is in the saddle. I have to laugh whenever I hear Republicans ranting that Barack Obama is a “liberal” or a “socialist” or a communist. Are you kidding me? Obama is Bush 44. He’s a bit more like the old man than the younger one. But look at who’s still running the economy: Bernanke. Geithner. Summers. Goldman Sachs. J.P. Morgan Chase. We’ve had the same establishment in charge since at least 1987, when Paul Volcker stood down as Fed chairman. Change? What “change”? (And even the little we had was too much for Wall Street, which bought itself a new, more compliant Congress in 2010.)

8. Ben Bernanke doesn’t understand his job. The Fed chairman made an absolutely astonishing admission at his first press conference. He cited the boom in the Russell 2000 Index of risky small-cap stocks as one sign “quantitative easing” had worked. The Fed has a dual mandate by law: low inflation and low unemployment. Now, apparently, it has a third: boosting Wall Street share prices. This is crazy. If it ends well, I will be surprised.

9. We are levering up like crazy. Looking for a “credit bubble”? We’re in it. Everyone knows about the skyrocketing federal debt, and the risk that Congress won’t raise the debt ceiling next month. But that’s just part of the story. U.S. corporations borrowed $513 billion in the first quarter. They’re borrowing at twice the rate that they were last fall, when corporate debt was already soaring. Savers, desperate for income, will buy almost any bonds at all.

No wonder the yields on high-yield bonds have collapsed. So much for all that talk about “cash on the balance sheets.” U.S. nonfinancial corporations overall are now deeply in debt, to the tune of $7.3 trillion. That’s a record level, and up 24% in the past five years. And when you throw in household debts, government debt and the debts of the financial sector, the debt level reaches at least as high as $50 trillion. More leverage means more risk. It’s Econ 101.

10. The real economy remains in the tank. The second round of quantitative easing hasn’t done anything noticeable except lower the exchange rate. Unemployment is far, far higher than the official numbers will tell you (for example, even the Labor Department’s fine print admits that one middle-aged man in four lacks a full-time job — astonishing). Our current-account deficit is running at $120 billion a year (and hasn’t been in surplus since 1990). House prices are falling, not recovering. Real wages are stagnant. Yes, productivity is rising. But that, ironically, also helps keep down jobs.

You know what George Santayana said about people who forget the past. But we’re even dumber than that. We are doomed to repeat the past not because we have forgotten it but because we never learned the lessons to begin with.

215 comments:

Stoneleigh, I get the first part of your prediction: Sometime in the next year or two, all these companies that are drilling madly, with negative cash flow are going to blow up.

Two-ish years after that shale gas production will collapse as well. A quick google says that shale gas is about 10% of current production.

I know that natural gas is priced at the margin, which makes the price very sensitive to small supply swings.

However, it is my understanding that the middle east, Qatar in particular is making so much money from natural gas liquids that gas itself is virtually free to anyone who will pay the cost of liquifaction and hauling it away.

It is my further understanding that the required US price to make this profitable (given the free gas at the other end) is about $4.50/Mcf. (Physics major, capital M means Mega.) Bloomberg says the current price is $4.16.

So that is roughly a 10% rise in the wholesale price, which would virtually be noise to a retail user or a buyer of NG produced electricity.

According to eia.gov, US LNG import _capacity_ is about twice shale gas production. At current prices, much of this is idle, so a bottleneck there is unlikely.

All this ends up at: Do you have a SWAG at what a collapse in US shale gas production will do to the wellhead price in Qatar? IMO that's what really matters to the US/North American economy, not T. Boone Pickens being left only rich instead of really rich.

So employment up 18,000 but the dubious B/D model added 131,000. Last month was revised down to 25,000 from 54,000 and last month's B/D addition was 206,000.

So 337,000 fantasy jobs from the BLS in the last 2 months but they can only 'create' 43,000 jobs? LOL.

And remember the McDonald's 60k jobs were going to be added over May and June.

So ALL the jobs added over May and June were McJobs, paying an average annual salary of $8,540!

In the last 1 year the Civilian noninstitutional population has risen by 1.8 Million people but the Civilian labor force has declined by 263,000 people in that same time period.

Participation rate down from 64.7pc to 64.1pc and the Em-pop ratio is struggling at 58.2 from 58.5 last year.

The number of people employed has risen by 242,000 in the last year BUT the Not in labor force category has risen by 2.06 Million people!So for every person who gets a job close to 9 people drop out and are not counted.

The problem is obviously in the Bureau of Lying Statistic's birth-death model. If we could boost this number, the employment picture would brighten considerably. Perhaps if a years supply of condoms and a cyanide capsule were issued to every statistician and administrator at BLS, this would increase birth-death job growth.

Frank

As Europe is totally dependent on NG from Russia, why aren't they sucking up all of Qatar's "free" production? Are LNG ships allowed through the Suez canal. The are energetically mobile tactical nuclear weapons.

According to one long-term measure — “Tobin’s q,” which compares share prices with the replacement cost of company assets — shares are now about 70% above average valuations.

Napier's "Anatomy of a Bear" found that in our worst four bear markets since 1900, the best time to buy stocks was when q was 0.3. If current S&P is 1340 that means a fall to 236. We are supposedly at the cusp of wave 3 down and need to be at the end of wave 5 to correspond to the 236 figure, an 82% fall!

Since the early 70s capital reinvestment, meaning finding profitable, socially beneficial, ventures has been getting harder and harder. Which makes sense if you understand that the economy has been growing at 2.25% per year since the early 1800s. So there is exponentially increasing amounts of capital on the world stage that is seeking growth(for the sake of growth). This is why it has shifted to constant bubble blowing, the commoditization of everything and other ventures that reinforce socially negative conditions as well as increase instability. For example the security state has been a huge growth industry over the last decade or the massive increase in pharmaceutical sales. Two instances where treating symptoms and or creating problems is profitable, whereas fixing root causes is industry destroying.

So what we have is the process of capital reproduction and profit decoupling more and more from increasing social well being. In fact, it is starting to have a very noticeable inverse effect. And is also diverting precious resources to socially destructive ventures. As John McMurtry, moral philosopher and ethicist from University of Guelph in Ontario, calls it. The Cancer Stage of Capitalism.

" Bubbles are formed as an interaction between predators and willing victims blinded by greed."

This is the micro dynamic - but, more importantly, bubbles are formed due to excessive capital seeking growth in a world with nowhere to put it, but bubbles.

@elG I'm pretty sure LNG carriers are too big for either canal. "Capesize" as they say.

About Europe, the last couple years Europe has been playing hardball with Russia exactly that way. LNG to the UK (terminals in Wales and the Isle of Grain), run it through UK storage facilities that North Sea production can no longer fill, and tell Putin the number he has to match.

I doubt Merkel was actually happy, but it's as touching as it rare when the UK and France see their interests aligned.

@elG. Just noticed your use of "totally" Please don't say that in the UK, Norway, Netherlands or Iran. UK and Netherlands are roughly 0 import, 0 export, Norway and Iran are net exporters (Iran only gets to Greece, but more than 0 is more than 0).

@Stoneleigh, Your article on gas is FANTASTIC and useful. Useful is " GOOD " these days:)I have noticed that houses/condos heated by electricity are on the market longer, are valued less that houses heated by gas. I also notice many houses have a gas fireplace( often several ) as opposed to older houses that have a wood burning fireplace. I'm hoping anyone entering the real estate market takes note of your article and tries to find a home with multiple heating options.

Yeah, I guess it's mainly Germany and France that suck Russian NG, and eastern Europe, particularly Ukraine. Obviously countries that have a piece of the North Sea deposits do not. Last I looked, Iran was not part of Europe but they do have huge NG reserves. The size and explosive capacity of these LNG tankers is really scary. I imagine one could take out an entire port.

As I mentioned in a recent post, a large percentage of passenger vehicles and pick-ups in Argentina run on NG stored in high pressure tanks in their trunks (boots?) or beds.

""The ultimate solution to make the numbers look really, really good is to cut all the gov. spending to the poor. After they have died the numbers will be fantastic. ""

They tried that during the first depression. What they found is quick demographic transitions leading to starvation and poverty leads to social pressures against the power structure. So, it needs to be done as slowly as possible so people internalize their plight as their fault. Cultural conditioning reinforces this as the "Market" is the ultimate arbiter of life and death with the invisible hand as the grim reaper in our economic ecosystem.

Gerald Celente also gives another excellent interview last week on Max Keiser and covers somewhat different subjects than on the other link:

http://www.youtube.com/watch?v=Io8W0p2J4_M&feature=player_embedded

I agree with almost everything Celente says and enjoy the way he deliverers it. He flies in the face of the dumb as rocks libertarians who keep saying that the problem with the USA is that it has become a democracy as opposed to a republic. Gerald says that the only hope to throw off the banksters is for the country to, in fact, give up on the republic (the Constitution is already in the dumpster) and become a true democracy, and that it's his new campaign. Max points out that the only country that threw out the international banksters did it with a universal referendum. As Greece, Ireland, and Portugal prove, it's just too easy for the banksters to pay off the mis-representatives.

The one area where I disagree with Celente is that he is a hyperinflatinista. He states clearly that the only reason the countries can even vaguely pretend BAU is because they printed tens of trillions of funny money. But then he says that they now are going to pull the plug on the digital printers. This is going to lead to an economic collapse as well as a collapse in the value of the buying power of the currency. I don't think you thought this one through Gerald. To go into HI, they would have to jack up the printing presses to warp speed, not pull the plug.

Frank,

Why is the end of the shuttle such a tragedy? How many poor man's 70 cc minimoto person hours can you run for the fossil fuel energy of one shuttle launch?

But don't fear, there will still be humans in space vehicles. They are just giving up the pretense that they are getting there using chemically fueled rockets but have no intension of going public with their successful black ops projects. But the details of this are not proper fodder for this site.

If USSA is an aspersion on the former USSR, you are doing the latter a disservice. Dmitry Orlov points out that the Russian practice of personal gardening allowed millions to endure the collapse, and the government didn't interfere with this. As to using gas or electric driers, particularly on hot sunny days, it should be a felony.

Excellent point regarding the former Soviet Union. I suppose I shall have to devise another jibe that attempts to align the current Reich with another historical regime.

In other news, my friends and I were reminded of our lack of freedom in a less critical sense on the 4th of July. We had the audacity to wade into the water and begin tossing a football around outside the "approved area" at the local beach.

Our crimes against the state brought a Pam Anderson/Baywatch/Gestapo wannabe sprinting down the beach to inform us that we were not allowed to wade and play catch outside the "approved zone".

Fine, except that the "approved zone" was filled with children in the 3 to 10 year age range that my grown friends and I could have easily trampled.

Since I left St. John, USVI a little less than two years ago, I have lived in Costa Rica, Panama, Argentina, and Mexico (as well as visited Uruguay and Chile). In all the countries I lived in, I owned a small motorcycle in the 110-125 cc range. I have had no negative interactions with the police in any of these countries. In Argentina I was stopped on the highway twice at "standard" road blocks and asked for my papers. I had some papers but they were not really in order due to the incredible labyrinth of paperwork in Argentina. I finally had to pay a specialist to register the bike and it took her two months including arguments and debates in the finer points of motorcycle registration ontology with other specialists. However, in both cases the police checked me out, and realizing what a pain I would be to process with my lousy Spanish skills, and that I was like the planet earth, "mostly harmless," they just eventually waved me on. In Mexico, though technically small motos and quads should be registered, nobody does it including the police with their own personal motos. You see kids under 14 driving them around.

I will have to go back to the "land of the free" soon to take care of some business, and I find the prospect somewhat daunting. Am I allowed to put in a request for a pretty, female TSA agent to grab me by my gonads, or does it have to be a bullet headed Bubba?

Norway's low sovereign risk should not be a big surprise. The biggest question is why they issue sovereign debt at all. Probably just to keep the hinges oiled. It kept it's own currency, the krone. It has a huge per capita sovereign fund from saving on its North Sea oil exports, advanced technology and a highly educated workforce, and a stable government. It's borders are guarded by Hagar the Horrible. Its only big negative is that they eat large quantities of lutefisk and actually like it, which indicates a certain mental derangement.

El. Gal-"I will have to go back to the "land of the free" soon to take care of some business, and I find the prospect somewhat daunting"

I have a small personal anecdote that may ease you a tiny bit.

Couple days ago my son and I took our walking tractors across 3 states to a distant planting, to do some critical mowing. In a very old pickup. With no muffler on it to speak of.

On the way, we were passed by at least 6 state trooper cars. And in Dubuque, on a side street detour, we passed a parked cop car with two cops just getting into it. The street was crowded; I was driving, I slowed down significantly so as not to hit any cops, and the truck was very loud.

Both my son and I were wearing pretty identifiable work clothes, and looking scruffy. The cop on the street-side car door looked up at me, directly- saw that I was slowing for him- and responded with a purely friendly smile and wave.

And we drove on, in blatant violation of all noise laws; but looking like just plain hardworking joes.

All the cops smiled. No tickets.

I'm quite sure other experiences are possible; but so are these kind still.

A cursory check indicates that the only publicly acknowledge current manned space launches in the Russian program involve ferrying for the International Space Station and this eats up half their space budget. Nothing beyond that seems to be planned. Russia halted its space tourism for $35M a pop last year, but may restart it in 2013. If this is incorrect, I would be curious to learn otherwise.

And yes, a good deal of Russia is in Europe (though most of it is in Asia) and Tsar Pyotr and Tsarina Ekaterina would be disappointed that many people forget that. They even made French the court language.

I'll just mention in passing that when old Werner dropped in on one of our ALDS ops at the cape, he still looked just as German as ever. I'm pretty sure some of the guys following him could have passed for Germans as well.

The Russians may not have a big space budget, but they can still shoot men into space and we cannot. Not that shooting men into space is really all that good a use of money.

@el G. I went out to see Sputnik when I was 4 years old. I witnessed both Apollo and shuttle launches. I can't swear they got to the moon, but they sure as hell went up, and then came back down. I've seen an orbiting shuttle through a telescope. For that matter, I have satellite TV.

The US, Russia/USSR and China have launched people. In addition India, Japan and the EU have launched unmanned craft.

So you claim that every time the rocket was just for show and some black ops magic box did the real pushing? I honestly can't help seeing Flash Gordon spaceships on strings with sparklers stuck up their rear ends.

I've fired many a toy rocket in my time, and several much larger ones whilst on the payroll of a defense contractor. Rockets actually work.

I'm going with William of Occam on this one.

@Nassim, half points at most. Yes I meant the flippin' EU. The Russian Federation is the size of all Europe, EU and non-EU and European Russia alike. And their shuttle fly-alike never did work. And I acknowledged their 50 year-old tech that does at least actually work. And finally Baikonur is in Khazakstan which is not in Europe.

Well OK let's be wary of a natural gas bubble. But at the same time let's recognize there are many factors which tend to support and even inflate that bubble.

One would be the desperate pressure for good paying jobs in the heartland.

Another would be Obama's EPA putting the screws to continue use of coal.

Yet another would be utilities who need to put new, clean, generating capacity on-line.

Shale gas isn't a clean source of energy. It's worse than coal environmentally in many respects. That will be the subject of my next post. When something is environmentally destructive, and is so low in terms of net energy as to be not even slightly part of any kind of energy solution, then it is not worth the price we pay.

The same applies to tar sands, which I may write about at some point. It's nothing more than an arbitrage between a gaseous fuel and a liquid one. Right now the liquid fuel is worth more, so people can make money at it, even though they produce little no energy, but that won't be true in the future. Natural gas will go over the edge sooner than oil in North America. Then tar sands production will stop, unless insane subsidies are applied to keep a non-sensical activity going.

Well, I guess bitterness is one answer. Though I don't care much for the taste myself. There are two really good reasons why Usanistan lost manned launch capability.

The first and most important is that we are much more deeply committed to spending more than almost all the rest of the world combined on militarism. We just didn't have money to design and build a new vehicle. The second reason is that unlike our wiser Russian friends, we threw away perfectly good launch vehicles in favor of the hideously expensive shuttle. I think the Atlas, Titan III-C and Saturn I were all good birds.

As to the ouija contact with the ancient mariners, what would you want me to ask them?

So it sounds to me like you are saying that nuclear is truly the only viable source of energy for the next dozen decades. That explains a lot of why GE has been sucking up to Obama and the goofy green movement. I've been wondering where to park my money too. You don't get much more blue chip than GE.

The Russians may not have a big space budget, but they can still shoot men into space and we cannot. Not that shooting men into space is really all that good a use of money.

I think that most of us can agree on that one.

As regards Russia being mostly in Asia and launching rockets from neighbouring, Asian, countries. So what?

The people who count are all European-looking and consider themselves Europeans. Culturally, they cannot be considered to be Asiatic.

That huge piece of empty land in Asia is little more than an appendage - a colony with a tiny truly indigenous population. The Russians got to it before the Chinese or the Japanese and that is all there is to it. For that matter, China is much larger today than it used to be historically. The Chinese grabbed the other side of the Steppes which never were theirs. That is what petrol and the mechanical horse help you do.

If you really want to know what Europe is going to look like before too long, keep and eye on what Germany and Russia are doing together.

So you claim that every time the rocket was just for show and some black ops magic box did the real pushing? I honestly can't help seeing Flash Gordon spaceships on strings with sparklers stuck up their rear ends.

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I have claimed nothing of the sort.

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I'm going with William of Occam on this one.

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The key point to Occam's razor is that one must have all the evidence. If one only has a sliver of evidence, then Occam's razor is really quite useless.

It's quite interesting what an emotional response my little aside has drawn. Perhaps one should considered one's own pre-conditioning.

But I am now going back to my simple No :-) response of earlier. If people want to believe that the emperor is wearing clothes, who am I argue. I don't even care. And this is definitely not the right venue to discuss an issue like this.

if I understand the board correctly, werner herzog did the footage for the moon landing, then, and he didn't do the footage for 'the wild blue yonder.' I always knew he was a genius. my bicycle is named huerequeque, but you can call him keks.

What an incredible stroke of deduction. I suppose that even Holmes would be impressed. So, no doubt putting all your loot on GE should be a guaranteed winner. Unless of course something unfortunate should happen. Oh, like for instance much of GE should suddenly cease to exist as operating facilities. This panel discussion regarding nuke plant safety is informative.

one of my best friends recently left his position as lead programmer at a local company that runs a popular software platform for amazon.com marketplace vendors in order to pursue a startup that will convert linked-in's member data into a free and visually attractive online resume, while also offering customizable features for a fee. his former employer offered to double his already formidable (by gen-X portland standards) salary and when that failed offered on top of that a 32hr workweek. needless to say, when he first told me he was thinking about leaving I reminded him that he is the best example I know of stoneleigh's prescription that one would do well to be the most important person at one's place of work. I also reminded him of the extremely low overhead there. and then I did my best to be excited for him which wasn't very difficult coz he's a wonderful guy. best of luck to him I guess as he chases some ungodly sum. who wouldn't want to retire at 35? I live on my handheld so this apparent second-wave .com boom mustn't irk me.

>> They are just giving up the pretense that they are getting there using chemically fueled rockets<<

It still sounds that way to me. It's the word pretense. That makes it sound quite like you're saying that all, or many, previous, well publicized, flights were actually powered by black ops magic and the chemical rockets were a smokescreen. I believe there is sufficient evidence to dispute this.

If, instead, you're claiming that, after 54 years of largely successful rocket powered launches, the technology is being phased out in favor of black ops magic, well, yeah, whatever. Happy not to go there.

the milk dumping of the great depression is here... sort of. buyers can't connect with their mouths.

in conjunction with a proposal by .gov to update the definition of 'SNAP Trafficking', the overly complicit food coop up the street is now unnecessarily requiring non-SNAP receipts in order to get back the $2 milk bottle deposit because, as the (very nice) cashier unflinchingly put it, some SNAP buyers are apparently going outside and dumping the milk and coming right back in for the cash redemption. now they (and anyone without an eligible receipt) can only receive store credit. now that i've read the literature i intend to say next time that while i hate to think of milk getting dumped, the coop needs to mind its own business, it's got nothing to do with you, have you ever even seen anyone dumping milk in the bioswale?, even if some desperate SNAPers somewhere are impulsively dumping it must be obvious to you that the vast majority will be drinking it, why not just let them return their bottles like everyone else?, you are under no requirement to do otherwise, or is this a financial decision?

if i was hard up i'd be dumpster diving almost all my food and buying lots of small bottles of milk for the cash redemptions. who wouldn't wanna retire at 35?

here is the relevant summary from the included link:

"Specifically, stakeholders have witnessed SNAP clients purchasing large quantities of products sold in containers that require deposits. The clients have then taken these products outside of the store location, discarded the contents, and subsequently returned to the store location to claim the container deposit amounts in cash. Currently, bottle deposits are paid for with SNAP benefits when the item is purchased. Regulations do not require separating the container deposits from the eligible food items, as the container is not optional. While regulations prohibit exchanging cash for SNAP benefits, container deposits are difficult to track back to SNAP purchases. In many instances, containers are returned by persons other than the purchaser and in some instances returns are handled by bottle return machines. None-the-less, clients who intentionally purchased products in containers for purposes of disposing of the products and exchanging the containers for cash are, in effect, trafficking without a complicit retailer."

So it sounds to me like you are saying that nuclear is truly the only viable source of energy for the next dozen decades. That explains a lot of why GE has been sucking up to Obama and the goofy green movement. I've been wondering where to park my money too. You don't get much more blue chip than GE.

Both shale gas and nuclear are Faustian bargains. We run substantial risks that we don't adequately understand for the sake of continuing the lifestyle our energy windfall has given us. We think there are easy options, but there are not.

The net energy for nuclear over the whole life cycle is poor as well, and we risk leaving our grandchildren without the energy, money, or perhaps even knowledge to decommission a nuclear plant. Nuclear is a 'take what you can now and let the future be damned' strategy. Humans are good at finding and exploiting those. Future generations will not thank us for the legacy we leave them.

I completely agree shale gas is a boondoggle. But. It might be #10 on the North American hit parade. In the worldwide clusterfsck, I'm not sure it's in the top 50.

This is not the item that is going to fulfill your claim that within 5 years of 4Q2008 (when I started reading) no normal person will be able to buy petroleum products at any price. This might give us $8/Mcf natgas and $5/gal gasoline.

However, it is my understanding that the middle east, Qatar in particular is making so much money from natural gas liquids that gas itself is virtually free to anyone who will pay the cost of liquifaction and hauling it away.

Trade takes a major hit in a depression (down 66% in 2 years last time), at least partly because shipping depends on letters of credit, which depend on functioning credit markets. Those will be going away. Also, the fleet of LNG tankers is not rapidly expandable anyway.

We will really only get to use the natural gas from our own continent, and North America has peaked sooner than the rest of the world. We will have a gas crunch sooner than the rest as a result.

We have only the perception of glut, as we will see in oil in a few years time, when money is the scarce factor. It's a short term circumstance not reflective of the fundamentals at all.

“Methane migration through the 1- to 2-km-thick geological formations that overlie the Marcellus and Utica shales is less likely as a mechanism for methane contamination than leaky well casings, but might be possible due to both the extensive fracture systems reported for these formations and the many older, uncased wells drilled and abandoned over the last century and a half in Pennsylvania and New York.”Methane contamination of drinking water accompanying gas-well drilling and hydraulic fracturing -Proceedings of the National Academy of Sciences

"you are under no requirement to do otherwise, or is this a financial decision?"

I'm sure it's purely financial. I doubt the government cries over spilled milk. You do bring up a good point, about people "stealing the food right out of their childrens' mouths". What typically seems immoral to many in normal times will be seen as required behavior during the ongoing Depression, as those debt-dollars are increasingly hard to come by and people's lifestyle expectations fall flat. The pain of losing is much greater than the pleasure of winning.

I thought depression was imminent. That's been the message at TAE. Now we're talking about money being short a few years from now?

That's quite a shift in your position.

No it isn't. Money will be scarce much sooner than that of course (it already is for many), and that scarcity will continue for years. The impact of money scarcity on investment in the oil industry, and the consequences of that, will take much longer to play out. The naural gas industry is simply ahead of the curve, but the same dynamic is coming for oil (probably without the comparable mania over some alternative source of cheap and endless oil).

Just for devils advocate purposes, an opinion: the new nuclear tech would be efficient reducing the stocks of "spent" nuclear fuel waste that contain 95% of their energy unused and still radioactive. BUT, would any new nuke plants be built out of reach from acts-of-god and away from large populations? As a species we behave so greedily.

Old nuclear should be decommissioned, new nuclear designs built and hurry up about it.

“Just for perspective, The TARP bill was about $700 billion. One nuclear plant ~ $6-10B. Arguably, the U.S. could have "invested" in up to 90 nuclear power plants (with a 60-80 year production future) if we had put our mind to it.

If we want safe, cost-effective, reliable, non-carbon electricity we must include nuclear power as part of our overall energy portfolio. Failing that, we are going to wake up one cloudy, windless day when the light switch doesn't work and discover we've forfeited our capacity to lead the world because we ignored nuclear power, a problem-solving technology that we ourselves invented.”” Nuclear Power as Part of Our Energy Surety & Economic Security Future - Mark Miller, Sandia Laboratory

“The supposed problem of "nuclear waste" is entirely the result of a the decision in 1976 by President Gerald Ford to suspend reprocessing, which President Jimmy Carter made permanent in 1977. The fear was that agents of foreign powers or terrorists groups would steal plutonium from American plants to manufacture bombs.

That fear has proved to be misguided. If foreign powers want a bomb, they will build their own reactors or enrichment facilities, as North Korea and Iran have done. The task of extracting plutonium from highly radioactive material and fashioning it into a bomb is far beyond the capacities of any terrorist organization.”There Is No Such Thing as Nuclear Waste -William Tucker, WSJ

Everyone knows Dubuque cops only stop brown people. I drove around in a car with its back end bashed in such that the trunk wouldn't close and most of the rear lights didn't work for, oh, six months? Cops never so much as blinked.

"IMHO, trying to time these things is a mug's game - better hold and forget about it."

I have been going back & forth with certain people on FOFOA's forum for some time now, and it seems that "timing" and "personal circumstance" are the critical nuances that they fail to consider. While I generally agree with you that, once you make the decision to invest in PMs, you should store them away safely and forget about them, that is only after you have made the decision. Before, it greatly depends on both what you think is most likely to occur in the near future (deflation or HI) and, of course, the numerous details of your personal situation.

I am not recommending day trading on precious metals, but the subject of long term "wealth" storage of PM's does come up often on this blog, as well it should.

The authors of the article have a very different equities market projection than Stoneleigh has, and consequently a different mid-term outlook for nominal gold prices. What I found most interesting about the article was the graphic against time showing the plunge in gold during the 2008-9 crash, which the authors chalked up mainly to covering margin calls. If the markets crash in a similar but even more intense manner in the next week to 18 months, as many savvy observers expect, we could see another precipitous drop in the nominal price of gold. As to what each reader would wish to do about this, everyone's milage will vary.

yes, thanks deflationista for the dark ages america blog. i found in the comments section of berman's joe bageant post a 50min talk by robert jensen that i think is great. it's back-door doom, perhaps, as it is couched as the more accessible concept of unsustainability, with one brief mention of the former word. a back to basics sort of approach. he's humorous, too, and prefaces his talk by joking that he gets invited to speak often but rarely does he get invited back.

(unfortunately, the video of him is interspersed periodically with distracting footage.)

Hi EveryoneIt has been about 2 months since I started reading the writtings on this web site and I love itI thankNicole Foss StoneleighAshvin PandurangiIlargiI was able to see pictures of Nicle and Ashvin but not Ilargi anyway thats ok.I was wondering about playing future options on gold I think it will crash but I am always wrong at predicting the price of gold.What do you folks think

I work in Ft. Worth and one of my friends has 3 shale gas wells in a sweet spot that has been producing very well here for the last 4 years. Not all wells are like her wells. We were talking about the lack of forage for her cattle due to the extreme drought conditions and I suggested that she sink a well and irrigate 10% of her land. She said she did not want to because the wells in the area are dropping too fast and she blamed it on the gas drillers who according to her are using as much as 5 million gallons per well and are not recycling the water.

there have been over 5000 wells drilled in the Barnett Shale, now that adds up to a lot of water for Texas to lose.

The one (and perhaps only) problem I have with Dr. Keen (and Koo) is that they tend to be a bit too idealistic about the application of otherwise accurate post-keynesian economic theories. That is evidenced by the suggestion that Europe would be better off if they further centralized financial authority in the ECB, to make it more like the Fed, in an attempt to maintain the ponzi via cheap financing for EU countries, gradual re-capitalization of the banking sector after the losses have been properly imposed on it and its shareholders, "productive" infrastructure investments, etc.

They are quite correct that austerity measures, especially the way they are being imposed now, are the equivalent of economic suicide. And theoretically, a well-intentioned and highly efficient group of politicians, financial officials, regulators, etc. could potentially pull a plan like that off in OECD countries. It would not necessarily fix the more fundamental problems we face, such as the environmental ones, but it would probably "buy" us a significant amount of time to work on those. However, as SA pointed out, that's just not how the system works.

The entirety of the structure, from its basic economic arrangements and incentives to its cultural and sociopolitical values, has been irreversibly compromised, and therefore a "modest proposal" like that of Koo's would most likely make the situation even worse in the medium to long-term. I suppose it's difficult to work in an academic field such as economics and not occasionally put forth "solutions" to the problems you diagnose. And I also imagine both Keen and Koo know that the "modest proposal" will only be properly implemented after Hell freezes over...

According to TOD the debt load on some of these gas producers is in the range of $20B to $30B. The industry as a whole probably less than $200B. When they go bust a BP or Exxon could buy these assets for pennies on the dollar and do it from the petty cash account. Damn cheap considering the amount of cash we send offshore. Then they sit on the resources until prices recover. Gee, oil companies have never done that before.*I know I'm being snarky and would never have taken the time to research this if Stoneleigh hadn't posted.... but geez louise this is so much negativity over just the routine facts of life. I get it!!! Life is tough, things don't always turn out the way we hope... However, there is a freaking huge amount of gas involved. That is GOOD news no matter how you slice it. Would it kill you guys to smile once in awhile?*

@JackRead the TAE primers. As long as you don't count yourself as an "investor", speculating is fine. Just know what to expect (massive loss, the game is rigged, the house takes all, etc.)Welcome to the worrying club. Leave all hope behind. ;)

The exact hugeness of the shale gas is still unknown. What is well known is how reluctant it is to come to the surface. That portends modest profitability, at best, for any leaseholder.

Industrial civilization is already teetering on the brink of collapse. Any sustained natural gas price much above break even would give it quite a hefty shove. Out here among us nobodies, things are substantially more grim than you seem to perceive.

Also worth considering is the likelihood of BP and ExxonMobil finding themselves between Rock and Hard Spot. Without a functioning Finance System not much of anything works.

I want to thank Stoneleigh for confirming what I had visually taken away from the documentary "Gasland". I had posted about this 2 weeks ago or so, after watching that doc film. It appeared obvious to me that the process could not possibly be a profit maker without huge subsidies, at least. The structure of the ponzi hadn't been obvious to me at the time but it is clear to me now.

I will post the link again, for anyone who has not yet watched this important doc film.

http://topdocumentaryfilms.com/gasland/

Keep in mind that Gov. Cuomo recently lifted the ban on fracking in New York State (probably a quid pro quo for championing the gay marriage issue). Residents of NYC should be very, very concerned.

I have a mental picture of the stream of humanity thousands of individuals wide and marching from the ancient past to the unknowable future. By my reckoning this stream of people has to total some 18 or 20 Billion individuals so far.

Not one of those people have got out of this life alive. None of them ever will.

That stream has experienced much worse times than you can imagine. They have also marveled at our progress in fits and starts through the eons.

The black gulf you perceive is likely just another little rough patch on the road. And if the end is truly near what difference does that make to you? Your fate will be unchanged.

Negativity is so unbecoming. Remember the Italian hostage who yelled and fought back against the al-Qaida scum who then proceeded to saw his head off anyway? He died a man, not an animal sacrifice. Is there more you can aspire to?-

Stoneleigh and Ilargi are not negative people IMO. I have met them both in the UK, Stoneleigh twice, and I am impressed with their patience and positivity in trying to get their warning message out. When faced with such cliffs of denial and ignorance, I'd have given up and gone home long ago. I can't speak for Nobody of course! Nobody can!

I have a good story! S&I were sitting in our friend Jo's kitchen in Coventry eating soup and working on their laptops. My wife and I had brought along our baby boy and Stoneleigh and our friend Jo were genially fighting over who got the hold the baby. Ilargi, having just finished his soup, leaned over and grabbed the baby's used sick cloth and wiped his mouth with it! My wife and I thought it best that he didn't know about this, until now, that is!

"" When they go bust a BP or Exxon could buy these assets for pennies on the dollar and do it from the petty cash account""

More wealth and power concentration into the hands of a few via bubbles(sophisticated, organized robbery). I guess it would be a pretty good scam if the majors in cahoots with their banking pals, provided the fuel for this bubble - all in a big pump and dump scheme. This along with the housing bubble gains will be two nice halls for our masters.

"Negativity is so unbecoming"

And faux-optimism is toxic. See, the problem lies with the optimism, of feeble minded nitwits, expecting perpetual motion machines and praising large corporations for their business acumen, while awaiting the fulfillment of our cultural thesis- which is to cover the world in shopping malls(with multi-level parking garages).

For me, optimism is this plan is not going to work out. However, I'm not to keen, nor do I think the antithesis - a short and brutish, Hobbesian wasteland is inevitable.

""Industrial civilization is already teetering on the brink of collapse.""

Lets define this a little more accurately. The rules to distribute, value and allocate resources is breaking down and driving civilization towards a social train wreck.

Financial civilization is breaking down. Or more broadly, the capitalist world system. The rules that operate it are being shown to be irrational and destructive.

Industrial society, as in a society driven by technology(the cultural manifestation of scientific knowledge), is not going anywhere. Well, unless we blow ourselves away, which is not completely out of the question.

I guarantee the rules to run computers and machines are more valid and will stand the test of time, longer than the rules of money.

Money is not going to save us. However, technology will always come in handy. Civilization is a technical creation, after all.

Marcellus Shale is all the rage here in NE Ohio. Chesapeake (among a few others) have signed up/leased all the previously unleased farmland,esp., and whatever else they can for anywhere from $1500 to $2500 (give or take) they can.

I don't think much cash has actually been distributed yet, and is more promissary in nature.

One of the rumors I've heard is that the hope is that Oil is what's in Marcellus. We've had NG wells for nearly 40 years that still produce, but are slowing. I'm always just hoping enough NG continues to flow to heat the house. Even THAT is huge for me right now; heating costs would bury me because when I built my home, I figured there'd be no end to the money.

If anyone has other thoughts--I've considered solar panels--but those are just a possible alternative. I'm looking down the road, just in case.

@memphisFrom what I've lived in energy-poor times, I would bet on wood-heating one single closed room during the winter, warm sweaters, good sleeping bags.Solar panels to keep some electronics working (EMPs and solar storm excluded) for some cheer-up and a big smile on one's face (as required by board members lately).I know it's not what you hoped to hear, but cheer-up, it can only get worse.

For those interested in putting their PM's in a bank safety deposit box or their Precious Information in a Cloud, I found yesterday's Corbett report raised some interesting issues.

I have been a Mac user for over 20 years. It appears to me that the new Apple OS just released this week, Lion, seems to be quite integrated into the cloud concept and probably has many invisible "back doors." Think I will stick with the current version, Snow Leopard, until the grim reaper pays me a visit. Corbett suggests that the trend toward greater memory storage in devices may be about to reverse to enhance the migration to "the cloud." Additionally the trend seems to be to flash memory as in Apple's Airbook, as well as most handhelds, which is far more expensive on a GB basis than the traditional hard drive. Its primary advantage is very low power consumption but may offer greater speed and lifespan as well. The point being that very large flash memory capacity is much more expensive than hard drives.

And of course the cloud concept is based entirely on very high speed internet. If your telephone line or cable goes down (depending on your internet type of access), you are SOOL.

Furthermore, the NSA has admitted that it is capturing and storing all the messages and data streaming across the internet. But the cloud will enable them to access all your stuff that you have chosen not to communicate on the internet.

p01

My "security blanket" is a North Face goose down bag rated for zero F. I can attest from my time in Nepal over 4500 meters that the rating was accurate. If you can keep a high quality bag dry, you are assured of a warm refuge anywhere, anytime.

TAE's thesis is that when the depression hits, the majority of people will value food, protection, shelter, community, tools, knowledge much more than a pretty gold coin.

I agree.

Having said that, we aren't in the teeth of this depression yet.

So what are the drivers now? People realizing that their currencies aren't going to be of value much longer. Irish and Greek people are getting their Bank IOUs out of the banks and my guess is that they are buying some gold with the proceeds.

China is trying to reduce its dollar exposure.

The Big Finance Capital crooks are probably loading up their world bank entities with gold in order to use the idea of gold backed currency to create a world currency.

This may well drive up gold for a while.

But when the house of cards fall and MASSIVE deleveraging kicks in, I don't think gold continues to rise. I think it gets hit, too.

But gold has some nice properties. First, it isn't tied to the crumbling system. Even if gold went to $400 an ounce, it will be worth more than some clown who keep $1 million in the system and get nothing back.

If one wants to get some physical gold, one could look at buying $X amount fo physical gold under your own direct control and short some $X amount of some big fat pig stocks.

Gold will likely hold up better than most stocks during the deleveraging.

The problem is, those shorts might never pay when the counter party gets wiped off the face of the planet.

In addition to enjoying the arrogance to suppose that he knows what I can imagine, Metanis probably also believes that is the first time someone has ever said something like that to me. As in altogether too many of his comments, he is wrong.

Telling it like I see it has been my way since before I reached adulthood. As my dotted-line manager once said when his sales reps attacked me for not supporting their ill-chosen solution to a customers requirement, "he's not negative, he's positive it won't work." I stopped that one, but it was a large and growing computer company that was loaded to the gunnels with positive thinkers pushing destructive ideas. It no longer exists.

With so many determined positivists skipping around spreading unworkable ideas, somebody has to man the barricades. That unloved brigade has, does and will for awhile longer, include ole Nobody.

SA, is apparently right that the rules by which computers live do not change. At least they haven't in the 50 years I've been involved in measuring their brain waves. However, I don't think that is a particularly interesting or even pertinent observation. What about the rules that humans live by? Do they ever change? To my still fairly usable eyes, those rules look to be getting punched and sliced and pierced just about everyday now.

My chosen guru on the topic of technology and civilization has been for many years Lewis Mumford. I have a fair understanding of how they pervert each other. Right alongside police and fire services, the most unloved sectors of Usanistani society include the education system. Europe once lost a pretty impressive technological capability developed by the Romans and neighboring advanced civilizations. Thankfully, the Arabs didn't lose all of them and came up with a few of their own. In light of the social changes coming at us, our current level of technology will not be sustained.

I was disappointed to listen to your podcast report on the Greek crisis. The fact which every savvy follower of this situation is acutely aware of is that the bail out of Greece is a fiction. The true bail outs are of primarily French and German private banks holding Greek sovereign debt. The country of Greece is simply a pass through as AIG was simply a way, via the NY Fed and then president Tim Geithner, to pay off the multinational banks, including nominally foreign banks, 100 cents on the dollar for the CDS exposure of AIG which the company would have otherwise defaulted on in bankruptcy. Without this knowledge of what is behind the so-called Greek Crisis, your readers and listeners would find the sequence of events in Europe completely unintelligible. As a specialist reporter, I am sure you must be aware of everything I have written above, so my question to you must be, why do you fail to inform your subscribers? Is this in their best interest?

@Skilo

If gold is worth $400 an ounce, that means that the dollar itself has some serious purchasing power. Of course the entire scenario is based on hyperdeflation as opposed to hyperinflation. Under HD very few paper assets will have any value for sure. And your point that even if one gets the timing right to short the market, one had better bail out while your counter party still has enough Benny Bux left to pay you off.

According to Mr. Martin Armstrong August, possibly the week before the US Memorial Day will be the turn for the big gold and/or oil market shakedown.

"We are due for a correction. The months ahead are September and November in particular for turning points. What we have to pay close attention to is the hype that comes out. If the Investment Bankers are looking for force a liquidation to make a bang-up trade for the year since things have been quiet, the news will be spun to support their agenda. This is part of the game. When they wanted all the little guys in for 1980, the made the Hunts a household name. That was the setup. The little guy buys thinking he is running with the big dogs. The real big dogs stay well hidden and will NEVER step into the limelight.

The week before Labor Day (last week of August) may become the key week where a change in trend develops thereafter."The Fate of Gold & Oil

I just reviewed the German Constitution in regards to a vote of no confidence by the Bundestag. While the Bundestag can vote a no confidence in the government and early election may be called, early elections may only be held with the approval of the Chancellor. This has only occurred three times since the fall of the Third Reich and is always a strategic plan by the current chancellor to increase his party representation. The last time was in 2005 which backfired on Schröder as he lost the Chancellorship to Merkel. So it appears that Merkel is safe in her position until the scheduled 2013 elections regardless of how unpopular her actions. However, she mentioned this week that she intends to run again in 2013. If elections were held tomorrow, her chances would be dubious at best.

Also, Norway, whose air force has been quite active in murdering Libyan civilians, is withdrawing at the end of July. Holland will not withdraw its air force, but said it will in the future restrict its actions to the no fly UN mandate, meaning no further bombing. Berlusconi is purportedly under pressure in this regard also, strangely enough (perhaps) from the Northern Alliance, his neofascist coalition partners.

Yes, there is a big bubble around that one isn't there. I think that is a statement around which lots of arguments could get started. What I have observed is that human creativity absolutely can make lots of problems. I doubt it is powerful enough to create every possible problem. I am convinced it is powerful enough to create extinction level events.

Someone striking for recognition as a possessor of wisdom once said that the cause of problems is solutions. I have observed actual instances of this being true. What I wonder about is the relationship between solutions and new problems. I am troubled by the possibility that it's geometric.

I used to be told in corporatespeak that problems are actually opportunities. I was also reminded that our goal was to avoid putting ourselves in a position of being surrounded by insurmountable opportunities. Good advice, that seems to be hard to follow.

This posted yesterday by NHK World. Please note the part where it is mentioned that the "solution" to the Fukushima mess at this point is a speculative future product of human creativity. I sure hope we don't disappoint them.

NHK has obtained the mid- and long-term roadmap which was presented when officials from the operator of the Fukushima plant, government officials in charge of nuclear safety, and manufacturers of nuclear reactors met last week.

The draft roadmap drawn up by the government's Nuclear Safety Commission and Tokyo Electric Power Company says they tentatively set a target date to begin removing fuel rods that melted and fell to the bottom of the reactor.

The work is considered to be the most important phase in the decommissioning process. The roadmap indicates that removal will start in 2021 if technology essential for the work has been developed before that.

The timeline is believed to have been set based on measures taken following the 1979 Three Mile Island accident in the United States.

But unlike the US case, as reactor containment vessels were damaged at the Fukushima complex, they need to be fixed and filled with water.

The roadmap shows that reactor buildings could be finally demolished and cleared away after the removal of melted fuel rods is completed, and that it will possibly take dozens of years.

I like PM's. But thatsaid, using it for a typical transaction for goods involves both parties understanding its value. Or, you have to find someone who does. And, if you're the only one using it and everyone else is using dollars or peanut butter, it opens up a serious security issue directly back to your front door.

Almost everyone I know doesn't know the value of PM's. To get them to understand it would involve a lesson on finance and fiat currency. I'm not sure many will be convinced in short order. They'd probably take a bowl of soup over shiny metal.

This doesn't even address the issue, "How do I know it's real and not counterfeit?" from the person you're dealing with. Many will take a chance on counterfeit $20. But not so many on a 1 oz yellow coin.

Why not? Too many roads. Sell them to investors. Investors will buy the useful roads, charge tolls, and maintain them. Roads that aren't useful won't be bought. In due time they'll return to gravel and then to dirt.

When charged tolls to drive, people will drive more selectively. That's good. No?

Sell water purification plants. Private workers can purify water just as well as public workers. What's more, the public will be charged the true cost of water purification. Thus, water use will be more efficient.

In short, if you want efficiency and less waste, choose privatization.

"The U.S. government currently has about $233 billion worth of nondefense “property, plant, and equipment,” according to the Treasury’s Financial Management Service. That is almost certainly an understatement. The government owns somewhere between 600 million and 700 million acres of land, or about 30 percent of the country’s land surface, much of it in the Western states, where as much as half the land is federally owned."

I bet if the state sold off a chunk of that coastline, it would generate enough money to switch from debtor state to creditor state.

And before you dismiss out of hand consider this. If you stop along stretches of non-state park public owned coastline, you often find garbage strewn here and there. Tragedy of the commons writ large. Nobody washes a used car.Great Niall Ferguson Article on US Public Asset Sales

No. The country needs investment. Who can deny that it will improve living standards. With investment comes new roads, government buildings vs. trailers, hospitals, and true power plants vs. portable diesel generators. That's improvement, no?

Check out the latest news:"South Sudan is very open for business," said Doug Bushman, member of the Southern Sudan-American Trade Association. "They really need everything.".....Large-scale farming is virtually nonexistent in South Sudan, and there are just 30 miles of paved road in the whole country. Its capital, Juba, isn't connected by road to the south's largest towns. Some government ministries operate out of trailers."

"In short, if you want efficiency and less waste, choose privatization."

Yeah, I want less waste... in my water. Unfortunately, I doubt your recommendation to sell the local WTP to "Dasani" or whoever will move me closer to realizing that desire, or even in the right direction. In fact, I imagine some of those Dasani employees will be taking dumps in my water when their company lays them off to "cut costs and strengthen margins". Seriously, though, privatization of productive public assets is NOT what you want to see happen here, or anywhere. The "free market" for clean water will only take you so far before you can't even afford to give yourself dysentery anymore.

Even buzzards have some limits as to what degree of decayed road kill they will peck at.

Also

Don't think it has been linked here earlier but Max Keiser has an in person interview with Steve Keen who must be visiting France. Keen did link the long Koo lecture on his web site. As far as I could make out, Koo argues that the Japanese government propping up their zombie banks forestalled a drop in Japanese GDP in the order of 400 percent. Keen OTOH says that the zombie banks should have been taken and and shot with their equity and bond holders wiped out. i.e. capitalism :-) He claims that banking is necessary for a vibrant economy but it should amount to about 2% of GDP and bankers must be kept by force in small secure cages by the rest of society. He also argues that the outcome of the crisis could result in moderate inflation as opposed to deflation due to the additional factors of climate change and peak resources.

http://www.youtube.com/watch?v=3qo3t8EBNSg&feature=player_embedded

Bigelow

Thanks for the Armstrong link. Glad to see he's out of the slammer and in more comfortable quarters. He certainly does write in an entertaining style.

The free market is the tooth fairy. Capitalism needed state force and interventions to get started. It needed it to to be maintained and expand, and now, in it's dying days, needs it to admit CPR on a constant basis. The all encompassing market cannot exist without ever-present state interventions.

Apologists will always point to some "uncapitalistic" practices, that if hypothetically did not happen, would not have led to where we are now. It's just more economist post hoc. bullshit reasoning.

Abstract: This article discusses the appropriate role of private capital and the private sector in the provision of drinking water.

Arguments for and against privatization are presented, and the article sums up by stating that each individual circumstance should be evaluated for the appropriate mix between public and private participation for the ultimate goal of providing people with the clean water they need.

"I don't see one smidgen of evidence suggesting that the public companies are a better safeguard to public health."

Your kidding right? Actually, there is volumes of data, dating back a century, that show the pursuit of profit has an mysterious effect that seemingly makes people disregard public health. Just read "The Jungle". And they will actually spend millions to sow doubt regarding the ill effects of certain products and practices on public health see: Merchants of Doubt - "How a Handful of Scientists Obscured the Truth on Issues from Tobacco Smoke to Global Warming". Actually, to even be concerned about public health is an anathema to early capitalist social theorists.

"Get rid of the gov. inspectors and and application of standards, like they are trying to do in the USA and guess what will eventually happen."

You'll balance the budget and maybe even run a surplus.

Look, I'm not saying get rid of the inspections. Just reduce them to a more reasonable level. The water is clean, ok? How many times do you need to prove it already. That's all I'm saying. Most of these inspections are totally redundant.

No teachers salaries to payNo new pensions contributionsNo more schools need to be builtNo more buildings need to be maintained....in fact they can be sold-off

Existing school assets (e.g. school buildings, computers, buses etc.) can be sold off to private sector ventures. These assets could even be auctioned at sub-market valuations. Corporate migration to these valuable real estate locations will stimulate the creation new non-government jobs in the local economy. Employment and lower taxes. What's not to love here?

Now those red-brick money pits become cash cows instead. And those places are sitting on some major real estate.

While most of the assets are sold-off, keep the the sports like football and basketball. These institutions already pay for themselves. Excess profits from ticket sales can be used to subsidize a marching band because that adds atmosphere to the events.

The buildings can serve as new private sector innovation hubs.

Other benefits of internet based colleges:

1) disaggregate the professorial class. The private sector needs hungry talent, and lots of it is currently tied up in these ivory towers.

2) End to tenure based job maintenance systems. 3-month renewable contracts keep performance at a maximum level while offering a modicum of job stability.

I'm not a "gold bug" and I don't believe gold has any intrinsic value beyond being a cool looking metal that has been used as a store of wealth and money throughout history.

So I don't know that it makes sense to "convince others of gold's "value.""

What is its value?

I don't know and it will change over time, often significantly.

But it has one thing going for it - it is out of the system. the system that will end because it is an unsustainable Ponzi scheme designed, from the ground up, to blow sky high and take down the sovereign nation state with it.

If I had to guess, though, I think gold will take a severe hit, but so will lots of things. It (in physical possession) won't go to zero as will most paper investments, though.

Remember, a one eyed man is king in the land of the blind.

Alas, most people aren't mentally prepared to accept their monetary system is a debt based Ponzi scheme, so they won't.

@el g, I think a severe deflation is coming, which will be followed by a severe inflation.

It is quite simple, really.

The severe deflation asset strips the debtors in society and the severe inflation balances the books once all the assets are stripped.

>>I was disappointed to listen to your podcast report on the Greek crisis. The fact which every savvy follower of this situation is acutely aware of is that the bail out of Greece is a fiction. The true bail outs are of primarily French and German private banks holding Greek sovereign debt. The country of Greece is simply a pass through as AIG was simply a way, via the NY Fed and then president Tim Geithner, to pay off the multinational banks, including nominally foreign banks, 100 cents on the dollar for the CDS exposure of AIG which the company would have otherwise defaulted on in bankruptcy. Without this knowledge of what is behind the so-called Greek Crisis, your readers and listeners would find the sequence of events in Europe completely unintelligible. As a specialist reporter, I am sure you must be aware of everything I have written above, so my question to you must be, why do you fail to inform your subscribers? Is this in their best interest?<<

@el g,

Nice. You are about to find out if this guy is real or a Big Finance Capital disinformation machine on the payroll.

@Bob, I sure don't want to put a survival necessity like water under the control of a private corporation. Jeez...before you know it even you won't be able to afford to drink it. Much better for water to remain in the commons. What next? Privatize the air we breathe? That said a lot of folks died up my way in Walkerton because the local municipality had a dumb fcuk doing the testing. Privatising water means the gov't still has to monitor the testing. No guarantee they won't be bought off or the data fudged. The water data as in contaminants is being fudged now by both corporations AND gov't in Alberta. People dying...strange looking fish in the rivers.I'm all for efficiency but I think you are naive to think corporations are efficient. Quality is compromised again and again to keep cost down. I DO NOT WATER THE QUALITY OF MY DRINKING WATER COMPROMISED for private profit. I feel despair when I read about the degradation of water, the rivers, the lakes, the oceans...

Silko said:"Ask Bolivia how that went down - EVEN THE RAIN WATER WAS PRIVATIZED! Or should I say, USING RAIN WATER WAS CRIMINALIZED."

My reply:The unauthorized capturing of rainwater in a private water distribution system obviously creates a free rider problem. Click here for an explanation of the Free Rider ProblemThe issue of water's affordability can be best dealt with through public/private partnerships, charity, and religious institutions. Subsidies may be necessary, but the issue is best dealt with through the invisible hand of market based rationing.

My last posting was just giving Steve Keen's latest take on the HD / HI question. I mention it because he was always a complete deflationista, and I believe this represents a certain change in position. He did base the inflationary counter balance not on finance per se, but on the effects of resource depletion and global warming on the global economy. Despite the fact that I consider him to be the best tenured professor of economics on the planet, I am a bit dubious about this,

"It is quite simple, really.

The severe deflation asset strips the debtors in society and the severe inflation balances the books once all the assets are stripped."

Can't really agree with the basis of your projection. There are only two ways to vaporize debt in the known universe: pay it off or default on it through various types of bankruptcy. Even if it was contracted in current dollars and paid off in Zimbabwe type dollars, it is still paid off. In either case the books are balanced. However, there is no argument that there will be a minority who will buy up the assets of ruined individuals and companies for pennies on the dollar at the bottom and eventually the fiat will hyperinflate.

Perhaps our visiting missionary from the Council of Elders of the Latter Day Greed Is Good Saints may be one of them. Probably would amass his capital by pushing widows under the bus and stealing their dead husbands gold wedding bands. BTW, we don't want your steenkin' smallpox laced blankets. Go find some other natives to preach your gospel of individual greed to. People here are trying to figure out how to survive the sixth great extinction that your daemonic ilk has lit the fuse to.

As to Jeff Sommers reply:

"Buzzard, I wouldn't put it as starkly as you do. But I take your point. We'll come back to this. Thanks for writing and listening. Jeff

"" but the issue is best dealt with through the invisible hand of market based rationing.""

Indeed, this is the best way to take care of the surplus population of those with inferior genetics and low morals. The magic of the market(god) works wonders for these types of things.

"it is only among the inferior ranks of people that the scantiness of subsistence can set limits to the further multiplication of the human species ; and it can do so in no other way than by destroying a great part of the children which their fruitful marriages produce.‎"

I posted a comment here some time ago citing a reference in which it was said that Adam Smith's only reference to said invisible hand was to express his hope that it would restrain the moneyed interests from disadvantaging their lesser countrymen and their native land by moving their productive operations to foreign lands. I think we all know how well that worked. Invisible hands are only to be found on the invisible arms of invisible playmates.

Bob is an entertaining sock puppet, but facts must be faced. The only place where the ideas his masters force him to disseminate are known to have been implemented, without wrecking the society, is Tralfamadore. But as we know, the Tralfamadoreans are a very unusual species. I think Bob would like it there. Except for the part about being a zoo animal.

The worst thing about Bob's prolific paeans to privitization is how bassackward he has it. The activity that should be privitized is war and spying. Xe has proven that there are a goodly number of men willing to kill for a corporate commander. Corp's have also demonstrated some competence in spying. With those onerous and mostly useless operations off its budget, the federal gummint could almost live on its tax receipts.

""The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. ""

We need banks so we can pay our bills. Nassim Taleb correctly insists that banks should be treated like utilities, right alongside water and sewers. Risk taking is a separate matter having no connection to the utility aspects of banking. Gee, the laws used to be that way before they were changed so big banks could “be competitive” and other bull*hit.

SA said...They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.

It should not go without notice that his invisible hand has failed at that task as well. It's getting a little hard to take the man seriously. It now seems that what they intend and what they know swats that ole hand away as if it didn't even exist.

Since his hypothesis about the existence, or at least the utility, of invisible hands has proven so miserably wrong. I will experience no shame if I am not entirely correct as to how frequently he resorted to it as a device to cover the tracks of the Mammonites.

Yup, that Randian bullsh*t would crack up millions if one of Jon Stewart's associates were delivering it. That said, it is quite likely that much of it will come to pass. What the Mammonites clearly understood about humankind is that (a few exceptions notwithstanding) we hate to pay taxes and love to spend money. If you are one of them, what's not to like? Since they now have most of the loot, when your community can no longer afford to treat and pump water, it will have to be sold to some "generous" Mammonite offering to do their humanitarian duty. For a nice additional flow into their treasure house.

There are already people in Usanistan who are forced to buy their water from private companies. That is not such a huge problem. It isn't in their pecuniary interest to kill their customers. Though they won't take much note if you get a little sick now and then.

The GREAT danger lies with the interests, both private and public, that find it convenient or even necessary to poison the water, land, air, etc. Like for instance the frackin' frackers. Down the stretch, it seems quite likely that if starvation doesn't get you, your water probably will.

The uber-rich are a bunch of sociopaths.Once one has enough capital to cover the basic necessities of life, it is a total bore incessantly pulling on the lever to acquire more unneeded peanuts. More meaningful is to enrich the mind with history, philosophy, music and science. Activities which do not deplete natural resources or much capital.

In the end, amassing a great fortune andpower means nothing in comparison with being able to reflect upon a life guided by fairness, decency, honesty and compassion for those less fortunate.Our attitudes towards money are a reflection of our overall ethics, which are abysmal. Ethics is everything. Without ethics there is only madness.

More meaningful is to enrich the mind with history, philosophy, music and science.

Not going to happen. They're dumb as well as sociopaths. And some of them -those know what's happening- have dreams of going into the bunker/farmhouse/mansion when it starts. Why wouldn't they do it already and live off their farms and start some communities boggles the mind.Darn we're fscked!

The USD is up almost 2% against the Euro., which broke into the 1.30's for a few moments. This is a huge change in the currency markets over a few hours. European stock indices are tanking. With this strength in the dollar, of course the S&P500 is tanking, silver fell off a cliff, and gold is down though not as dramatically as some others.

Durden showed graphically that the PPT intervened fairly early in the game on Friday to melt the markets upward after the amazing NFP news. Counteracting a 2% USD-EUR change is going to take even bigger taxpayer bux.

The pig of the S&P500 is so fat for the slaughter. I am surprised the Owners could resist this long with so much 401-k and pension plan meat on the bone. Wall Street and the City must have ordered a truckload of XXL spittoons to deal with the salivation.

You are correct about the Wealth of Nations quote. Which is the most quoted.

However, people seem to neglect the other. Often times in a defense of Smith.

The core philosophy of capitalism is simple:

All of life is a competition for scarce resources and all human accomplishments come of this competition.

And if one follows his narrow "rational self-interest" that a natural harmony and social well being will come about. With rational-self interest, one can not think of other people. The idea of a common good is an undefinable and therefor empty notion.

What else was going at this time, was the application of the scientific method on a broad scale. Which led to an increase in goods and services and a host of other goodies.

What capital was good at early on, was finding new inventions and applying them to production techniques to increase goods.

What it took undo credit for was creating the "spark" for creation. It still does today.

After the discovery of fossil fuels, the increase in living standards and the spread of technology accelerated. As usual the magic of the market took the credit. So the oft-cited "technology is going to save us" dig, is really a misinterpretation of the cultural mythology of the "magic" of the market always solving societies problems.

Capitalism has ridden the coat tails of scientific innovation, via the institutionalization of the scientific method, and increased access to per-capita energy. With economists using post hoc reasoning the whole way.

Technology is going to keep improving, just less and less people will have access to it. And It will be used to police and suppress the masses "leveling impulses" - “were determined that persons of birth and fortune should control the affairs of the nation and check the ‘leveling impulses’ of the propertyless multitude that composed ‘the majority faction,’ - James Madison

Of course you are right. Of course there is only madness. Everyone subliminally knows this, that is why the fundamental human emotion is rage. But many persist in imagining with religious fervor that a demigod white knight with a magical bag of technologic tricks will save us. More likely, those that survive will do so by accident of circumstance as time muddles on.

memphis, RE heating in Ohio - I try to avoid the Mother earth News style of DIY projects, but I was looking at some of the DIY solar water heating systems at http://www.builditsolar.com/Projects/WaterHeating/water_heating.htm (found that site thru Archdruid's report). The big tank to store hot water and panels to collect heat seemed interesting. Add a few PV panels to run lights, radio, pumps. Blend in some wood heat, might be a solution?

By far the largest of Italy's banks, UniCredit appears to be in big trouble. It's stock fell 6% on Friday and the government stopped trading on it and banned naked shorting. Golem then goes on to describe through Austrian subsidiaries how much exposure UniCredit has to eastern European loans denominated in Swiss Francs as well as Greek debt. And the SF has hit its booster rockets and is headed straight up. (Whether this is rational as UBS and Credit Suisse are combined seven times the size of the Swiss GDP making a bail out unthinkable - but that is another story).

Golem then goes on to mention that there is today an emergency meeting of the financial EZ powers, and the French faux CDO of the Greek bail out is off the table and the German plan is back on. The German plan involves the bond holders of Greek sovereign debt taking a haircut and Greece buying them out. And where would bankrupt Greece get the money to do this? From the ECB of course. The French plan where the French and German banks would take no losses would take some time. The German plan is to take part of the money and run (a la the Steve Miller band). And why are the French and German banks considering taking a hit? Because they are aware that all hell is about to break loose and they want to shift as much of their potential losses to the EZ taxpayers as possible before it is too late.

Suggest you read the whole article if you are interested in such things. Now back to the aftermath of the Anthony murder trial or American Idol reruns - yours to choose. Land of the free.

I can't speak for my unconscious :-) but I meant no disrespect toward you. However the concept of all "negative" emotions being derivatives of fear was a concept that I recently encountered and it made a huge impression on me. Trying to deal with and overcome one's fear (no small order) then becomes the keystone to spiritual progress. Your post just brought it to mind.

Gradually the story became less about the banks owing us money and more about owing the bond holders.

It seems to me that our governments and their financial advisers from the banks have a double standard when it comes to debt and its repayment; one which greatly benefits the financial world and punishes the taxpayer.

On the one hand, the debts of private banks and those who own that debt, the bond holders, are being protected from any losses by the publicly funded bailouts. Public debt, on the other hand, at the insistence of the same banks and bond holders we have bailed out, is being paid down at breakneck speed, no matter what the cost in unemployment and the destruction of social services.

This double standard is creating two different groups with very different financial prospects: one group made of the bankers and their bond holders (the financial class), is doing rather well because, by not having to pay off its debts, its wealth – the money to make more money – is being maintained. The other group, the rest of us, find our wealth is disappearing because we are paying off not only our debts but theirs as well. Our welfare, pensions and pay are all being cut in order to appease the bond holders, while the banks and the money they owe us, seems to have almost disappeared from the story altogether.

So who are the bond holders and why are Europe's banks more concerned to pay them than us?

Finding out who the bond holders of a bank or a nation is isn't all that easy. But a few days ago Barclays compiled a chart of the top 40 holders of Greek debt. One name on the list is illuminating. EFG (European Financial Group) is the largest private holder of Greek debt. Only national banks and international lenders such as the ECB hold more.

So who is EFG? Well, they are a Luxembourg-registered group of companies. So are they from Luxembourg? Actually, no. The heart of the group is EFG Bank, which is a Swiss private bank. So they're Swiss? Not quite. The bank is 40% owned by the Greek Latsis family, whose fortune is managed by Spiro Latsis.

So when Greek taxpayers have their wages cut, their pensions shrunk and see the assets of the nation sold off, they will be helping to protect the Latsis's investment in Greek debt. And it's no accident that EFG Bank holds a lot of Greek debt. The bank set up a special fund in 2009, during the crisis, specifically to buy up Greek government debt.

I am inclined to agree with Mr. Buzzard that fear is the fundamental negative emotion. Frank Herbert made quite a big deal of the power of fear in his Dune books.

I have had the misfortune to be in close relationship with persons given to rage for much of my adult life. What they seem to have in common is A vague ill-defined fear that seems to have been lodged in their psyches.

Something I have been pondering for awhile and always end with this thought. Who would ever have imagined that two of the most dangerous persons ever to have strode across the Terra Planet would be women named Ayn Rand and Blythe Masters?

Well, there is certainly plenty that we should be afraid of...but chances are if you ever confront any of the evil head-on you will be labelled a paranoid. A tried-and-true rightist tactic.

One optimistic thought: When the bankster-financial monster has finished extracting the last sou from the "people who don't count", its components will be confronted with the task of devouring each other, and none want to be the next Lehman Bros.

The CBC weekly radio science program, Quirks and Quarks, reported last week that the operation known as a "fecal transplant," originally restricted from the TBTF banks to the taxpayer, is now becoming an actual medical procedure.

http://www.cbc.ca/quirks/media/2010-2011/qq-2011-06-25_04.mp3

IMN and seychelles

Yeah, I was a huge fan of Frank Herbert back around 1980. I remember Paul Atreides repeating the mantra to calm himself when in a life and death situation, "Fear is the great mind killer."

Neither IMN nor I are suggesting that one deal with the Owners by bending over and issuing an invitation. Fighting them, perhaps even with lethal force if one has no alternative, is legitimate. All we are saying is that:

1) Fear and derivative emotions such as rage cloud ones ability to act in the most effective manner.

2) They always wind up injuring oneself in the end and perpetuating the concatenation of human misery. Stoneleigh also emphasizes this point constantly.

With all due respect, the work of Ayn and Blythe is far from completed and affects far more people than have ever before been alive at the same time. None of the actors you mentioned had the opportunity to screw the entire planet. I think scale matters as well as degree of horribleness. And those two have brought forth plenty of horrible.

memphis, RE heating in Ohio - I try to avoid the Mother earth News style of DIY projects, but I was looking at some of the DIY solar water heating systems at http://www.builditsolar.com/Projects/WaterHeating/water_heating.htm (found that site thru Archdruid's report). The big tank to store hot water and panels to collect heat seemed interesting. Add a few PV panels to run lights, radio, pumps. Blend in some wood heat, might be a solution?

I am dependent upon NG from a farm well. Good for me b/c it's free but also worrisome b/c it can, and has, on isolated occasions gone down.

I really dislike either being cold or not being able to shower. I feel like I have a toe hold in both worlds: I can't believe things can get as bad as many predict but then, I can believe things could be worse. The folks were Depression kids, and the stories weren't pretty. I'm just trying to make plans B, C, D, maybe E. At least with a wood heater installed, I'd stay warm (I have access to wood as well) but every alternative I purchase is more expenditures out of pocket. It becomes difficult to balance.

Great, European Stabilizing Mechanism was signed today. The pact appears to require national referendums but as we clearly live in a post-democratic society, I wouldn't hold my breath here. In any case we can expect unprecedented scare-mongering as stock-markets are turning into yelly.

The details of the ESM pact were agreed on June 20th or thereabout - no information slipped into the open about it, though. It seems that the invisible iron fist of the free market is getting "better" in managing the puppets.

Arbeit macht frei, All ya who enter here, abandon hope and all that. Europeans can kiss their asses goodbye... I wonder how long it takes for me to walk across the Siberia (>_<)

Fred ruminates on an opportunity lost that would have prevented all that vexes us in these darkening times. Well, except for the parts that our kind seem to find useful and entertaining no matter what our material situation.